PAK, CHINA AGREE TO IMPLEMENT

FTA (FREE TRADE AREA)

Three years back Chinese
President Hu Jintao and
his Pakistani counterpart
Pervez Musharraf oversaw
the signing of a free trade
agreement between the
two allies here in
Islamabad on 24th
November, 2006. The
document was signed by
the Commerce Ministers of both the countries.

The architecture of the bilateral Free Trade Agreement includes Trade in Goods
and Investments in the first Phase and the leaders of both the countries have
decided to negotiate on Trade in Services during 2007 to enlarge the coverage of
the Free Trade Agreement.

LATEST ACHIEVEMENT

The enforcement of Free Trade Agreement (FTA) in services area between

Pakistan and China from October 10, 2009 is the latest achievement in FTA.
“China has a large market with demands at different levels, which would make it
easier to seek economic cooperation with a variety of countries at different
levels,” said Xu Ningning, executive secretary general of China-ASEAN at the 6th
China-ASEAN Expo held in Nanning, capital of south China’s Guangxi Zhuang
Autonomous Region.

“China’s participation in building FTAs has demonstrated the country’s efforts in

realizing free trade, especially in a time of increasing protectionism and trade
frictions,” he said. According to FTA, in trade Pakistan will open 102 sub-
departments in 11 service departments and China will open 28 sub-departments
in six service departments. For China, more FTAs means more business
opportunities and better trade environment, especially for those with less
advantages in outbound business in the past years. The trend of economic
globalization and regional integration would not end or slow down because of the
financial crisis, and only economies that followed the trend would prosper, said Li
Ruogu, Chairman of the Export-Import Bank of China. The China-ASEAN Free
Trade Area (CAFTA), which is to be established on Jan. 1, 2010, is under heated
discussion during the 6th China-ASEAN Expo in Nanning, the Xinhua news
reported. Guangxi, China’s south region bordering Vietnam, had already borne
fruits from the establishment of CAFTA. The region’s trade volume with ASEAN
jumped from 630 million U.S. dollars in 2002 when the building of CAFTA started,
to 3.99 billion U.S. dollars in 2008, official data showed.

After completing all procedures for entry into force, China and Pakistan have
exchanged diplomatic notes on the Free Trade Agreement on Trade in Services.
The Agreement will come into effect on October 10, this year. The FTA on Trade
in Services was signed by Pakistan and China during President Asif Ali Zardari’s
visit to Wuhan in February. The diplomatic notes were exchanged by Secretary
Commerce Suleman Ghani and Chinese Assistant Commerce Minister Wang
Chao, the diplomatic sources.

EARLY HARVEST PROGRAMME

The Early Harvest Programme between the two countries which was put into
operation on 1st January 2006, has been merged into this bilateral FTA. In the
overall package Pakistan will get market access at zero duty on industrial
alcohol, cotton fabrics, bed-linen and other home textiles, marble and other tiles,
leather articles, sports goods, mangoes, citrus fruit and other fruits and
vegetables; iron and steel products and engineering goods. China will also
reduce its tariff by 50% on fish, dairy sectors; frozen orange juice; plastic
products; rubber products; leather products; knitwear; woven garments etc.

Pakistan has given market access to China mainly on machinery; organic; and
inorganic chemicals, fruits & vegetables, medicaments and other raw materials
for various industries including engineering sector, intermediary goods for
engineering sectors, etc.

China and Pakistan are poised to widen the silk road between them by building a
free trade area (FTA). For Pakistanis, it is mainly a "cotton road.'' Currently, 70
per cent of Pakistani exports to China are cotton yarn and cotton fabric.
However, the country is also keen to promote its other products ranging from
mangoes to footballs.

During Pakistani Prime Minister Shaukat Aziz's visit to Beijing in 2007, a protocol
was signed for the talks on the establishment of an FTA between the two nations,
currently with an annual trade volume of around US$2.5 billion. Negotiations will
start in January 2008 and could be concluded within one year.

"I believe Pakistan and China will be very accommodating to each other in the
FTA talks because of good relations between the two countries,'' Tariq Ikram,
minister of state and chairman of the Export Promotion Bureau of Pakistan, told
China Business Weekly in an interview. "Pakistan will respect China's needs, and
China will also respect ours. The negotiations will not be difficult.'' Chen Chao, an
official with the International Trade Department of China's Ministry of Commerce,
also said the relationship between the two nations is a very favourable factor for
the FTA talks.
In economic terms, it would not be hard to obtain a win-win deal, he said. "The
difference between Chinese and Pakistani goods in bilateral trade is relatively big
and the number of their competing goods is relatively small,'' he said in a written
interview with China Business Weekly. Currently, more than 70 per cent of
Pakistan's exports to China are cotton yarn or cotton fabric. The rest are leather
products, minerals and seafood. China's main shipments to Pakistan include
machinery equipment, chemicals, electronics and footware.

Now Pakistan intends to sell more grain, fruit and vegetables to China. Shahid
Mahmood, commercial and economic counsellor of the Pakistani Embassy in
Beijing, said an "early harvest programme,'' which will mainly focus on
agricultural products, is expected to be rolled out six months after the FTA talks
are launched. Quarantine is a key issue here. Pakistan's Ministry of Agriculture
and China's General Administration of Quality Supervision, Inspection and
Quarantine are already talking about a mechanism to grant certificates to
qualified Pakistani exporters.

The farm products Pakistan wants to sell to China include rice, mangoes,
potatoes, onions, dates and apricots. People in Beijing and Shanghai will not see
much of these Pakistani produce appear in their supermarkets because,
according to Mahmood, they will mainly target China's western regions, with
which Pakistan has fairly good land transportation connection. Mahmood said he
recently travelled along the roads linking China's Xinjiang Uygur Autonomous
Region and northern part of Pakistan and found conditions there are satisfactory
enough for the expansions of cross-border trade.

For the Chinese side, a market with 150 million people in Pakistan is undoubtedly
a source of great opportunities. A Sino-Pakistani FTA, which will mean less or
zero tariffs for many products, could make the market more attractive. Ma
Chunyan, an official with the chemical section of the China Council for Promotion
of International Trade, sees a great market for Chinese pesticide and fertilizer
producers. "I know a woman making 1 million yuan (US$120,000) in commission
this year by serving as an agent selling pesticide to Pakistan,'' she said. Chinese
business people can benefit from the FTA not only by selling China-made goods,
but also by investing in the country, Ma said. Some Chinese pesticide producers
are already thinking about investing in Pakistan because of the market demand
and low labour costs, she said.

INVESTING IN PAKISTAN

Chinese companies already account for an important part of foreign investment

in Pakistan. About 500 foreign companies are now operating in Pakistan, 60 of
which are Chinese. Many of these companies are operating in the public utilities
and infrastructure sectors, such as mining, telecommunication and energy.
But an increasing number of Chinese consumer goods manufacturers are
entering the country. White goods maker Haier is already there and so are
Shenzhen-based telecommunications firm ZTE, Shanghai-based electronic
maker SVA and a number of motorcycle companies from Chongqing.

Ikram said Pakistani industries -- including fishing, stone processing,

automobiles, food processing, bicycles and gem stone cutting and polishing --
welcome foreign investments in particular. Mahmood made a special reference to
food processing, which is suitable for enterprises of different sizes. "A small
investment (in food processing) could bring huge dividends,'' he said. Nasir
Hussain, the National Bank of Pakistan Beijing office's chief representative,
offered an additional angle in commenting on the benefits for Chinese
companies' investing in Pakistan. The bank is the nation's largest commercial
bank.

"Chinese companies can use Pakistan as a gateway for penetrating markets in

Central Asian countries,'' he said. His bank already provided banking services to
Chinese companies doing business in Pakistan, Afghanistan and Kyrgzstan. No
Chinese banks have operations in this area. Pakistani investment in China is
relatively small. The most remarkable area might be the manufacturing of leather
products, according to Mahmood. This industry is mainly in East China's Fujian
Province and South China's Guangdong Province. FTA was raised at a time
when such trade arrangements are becoming increasingly popular and Pakistan
stepped up its efforts to promote trade and investment.

China is holding FTA talks at different levels with countries in Southeast Asia,
around the Gulf and in Latin America. Pakistan has signed an FTA agreement
with Sri Lanka. It is discussing the same issue with Iran and Bangladesh. It is just
natural that China and Pakistan should also establish an FTA, said Sun Shihai, a
senior research fellow with the Institute of Asia-Pacific Studies under the Chinese
Academy of Social Sciences. During the past few years, the Pakistani economy
has shook off stagnation and become healthier. The economy is estimated to
grow by 7 per cent in 2004, as compared to zero growth five years ago. Inflation
has dropped to a benign 4.5 per cent from 10 per cent in 1999.

The country is to hold an exposition -- which is said to be the biggest in the

country's history -- in early February to promote trade and investment. The
country's diplomats and trade officials are busy trying to attract business people
across the world to the fair.

IMPLICATIONS FOR SECURITY

It is hard to talk about going to Pakistan without touching on the question of

security thanks to the country's proximity to Afghanistan. The recent Chinese
hostage incident just added Chinese business people's sense of uncertainty
regarding doing business in Pakistan.
But Ikram said the chances of such incidents taking place in Pakistan is not
bigger than most of other places on the globe. "Most of the terrorists that entered
Pakistan after 9/11 have been finished,'' he said. In fact, the establishment of a
Sino-Pakistani FTA will also be significant in terms of security, said Sun. He said
the FTA will enrich the contents of the relationship between China and Pakistan,
which already call each other "all-weather friends.''

Developing economic co-operation is key to social stability in the cross-border

area because economic growth can significantly reduce violence and separatism
in this area, he said. Ikram said the FTA would not have a big impact on other
economies in the South Asia because Pakistan and other economies export
different commodities to China.

China's trade volume with Pakistan now accounts for 20 per cent of China's total
trade with South Asia, which also includes India, Nepal, Bangladesh, Sri Lanka
and Maldives. South Asian nations are discussing an FTA of their own. In fact,
China is active in promoting economic co-operation with the entire region. A
conference was held last week in Kunming, in Southwest China's Yunnan
Province, on co-operation between Yunnan, South Asia and Southeast Asia.

AT PRESENT

Secretary Suleman Ghani and Wang Chao co-chaired the opening ceremony of
the first meeting of the Trade Commission. They expressed full satisfaction on
successful implementation of FTA which had been operative since July 2007.
Pakistan’s Ambassador to China, Masood Khan, also attended the meeting.

Senior Joint Secretary Shahid Bashir and Deputy Director General Zhu Houng
addressed the technical issues in defining FTA’s regime which covers goods,
investment and services. The two sides also tried to address issues to refine
procedures for visa facilitation and dissemination of information. Both sides
expressed satisfaction that the international financial crisis had not affected
Pakistan-China trade which stood at US $ 6.9 billion in 2008.

Pakistani and Chinese officials said to get full advantage of FTAs all out efforts
would be made to explore investment in the manufacturing sectors in Pakistan
with buy-back arrangement. A free trade agreement with China when even
negotiations on a bilateral investment treaty with the US have remained stalled,
and the possibility of a FTA between the US and Pakistan has been shot down
by US officials in two administrations now. Heck, even the ROZ's to help combat
poverty and increase employment opportunities in the Tribal belt to counter
terrorism are still stuck up. And some Americans wonder why Pakistan has more
cordial relations with the Chinese - no substitute for loyalty and sincerity.