REPORT ON COMPARATIVE

ADVANTAGES OF PAKISTAN
AND CHINA

Authored by: ABC

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EXECUTIVE SUMMARY

Pakistan is a slow developing economy. Its comparative advantage is mainly in the cotton and textile

industry. The industry enjoys a high-quality raw material, but it lacks the opportunities to maximizes its

output due to various inland factors. The major challenge the industry faces is to provide subsidize and

uninterrupted electricity and energy resources with an effective supply chain and modern technology to

optimize its output.

China is famous for its low-cost labour and labor-intensive products. However, the country mainly

focuses on inter-regional trade and it lacks the maturity to exploit the regional market. China needs to

make effective trade agreements and economic aligns to make its regional market more mature and to

move its investment towards the less labour-intensive societies.

Tariff concession is the main factor for Pakistan to promote its products. China needs to shift its labour

surplus production to the geographic locations of labor-scarce society. Also, it needs to turn its

investments into more efficient innovation.

Australia can make ties and free trade agreements with China and Pakistan to align its imports cost-

effectively. Reducing the tariff and making bilateral agreements, the country has the opportunity to

streamline its imports and gather the market of low-cost products for its economy. Australia has also the

opportunity to expand its production and make agreements in the CPEC to enter into this market. As

there are new industrial zones are developing, Australia can enter into this market and make investments

in the field of vehicle manufacturing, solar plant projects, and energy resources. This can increase its

chance to increase the exports from the new land opportunities.

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Table of Contents

EXECUTIVE SUMMARY ...................................................................................................................... 1

PAKISTAN............................................................................................................................................... 4

Economic overview.............................................................................................................................. 4

Sectors of Industry ............................................................................................................................... 4

Pakistan Exports by Category .............................................................................................................. 5

Reasons for Comparative Advantage ................................................................................................... 6

Ways to Improve Comparative Advantage .......................................................................................... 7

CHINA ...................................................................................................................................................... 8

Economic Overview ............................................................................................................................. 8

Sectors of Industry ............................................................................................................................... 9

China Exports by Category ................................................................................................................ 11

Reasons for Comparative Advantage ................................................................................................. 12

Ways to Improve Comparative Advantage ........................................................................................ 13

The flow of Investment and Australian Benefit ..................................................................................... 13

References............................................................................................................................................... 16

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PAKISTAN

Economic overview

The economy of Pakistan is growing at a slower pace. The average per capita growth of this country is

around 2 percent. The adverse effects of COVID-19 in 2019 have created economic imbalances, but the

country strives seriously to overcome the issues in an effective way that results in an expected estimated

growth of 1.5% in 2021 that will rise to 4% at a stabilize rate in 2022 (International Monetary Fund,

p.21).

GDP GROWTH RATE, 2021 FORECAST

14.0% 13.1%

12.0% 11%
9.5%
10.0%
8.0% 6.8%
6.0%
4.1%
4.0% 3.1% 3.0%
2.0%
2.0%
0.0%
-2.0% Maldives India South Asia Bangladesh Sri Lanka Nepal Afghanistan Pakistan Bhutan

-4.0%
-3.4%
-6.0%

Source: Asian Development Bank. Asian Development Outlook (ADO) 2021 (April 2021)

Sectors of Industry

Pakistan is an agricultural country. Its agriculture sector plays a vital role in economic growth. The total

contribution of the agricultural sector in the economy is 22 percent of the total GDP in value and employs

almost 36 percent of its labor force. Major crops include cotton, rice, wheat, fruits, sugarcane, vegetables,

and tobacco. Livestock farming also has a significant role as the country is listed among the top 10 beef

and veal producers in the world. Pakistan ranks 4th in the world as the largest cotton producer that gives

the country a competitive advantage. Also, the country is abundant in natural resources, especially in oil,
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gas, and copper. Although the current COVID-19 outbreak affected the economy, the country’s

agricultural sector shows a positive growth of 2.8% (Pakistan Bureau of Statistics, 2020, p.2).

The contribution of the industrial sector in the GDP is 18 percent and it employs around 26% of the

workforce. Major industries of the country are the textile sector, oil refining, cement, fertilizer, and metal

processing. The textile sector has a major contribution to the exports and generation of foreign exchange

revenue. Another sector is maritime transport. However, this sector is mainly dominated by state-owned

Pakistan National Shipping Corporation (PNSC) and foreign shipping companies.

The contribution of the tertiary sector in the GDP is 54 percent and it employs around 39% of the

workforce which is almost one-third of the population (World Bank Data, 2020, p.3).

Breakdown of Economic Activity by Sector Agriculture Industry Service

Employment by sector 36% 26% 38%

Value Addition 22% 18% 54%

Source: World Bank Data, 2020

Pakistan Exports by Category

Pakistan’s major export contribution is in the textile sector which contributes 19% of the total exports.

Other categories include articles of apparel, knit or crocheted 14%, cotton 12%, articles of apparel, not

knit or crocheted 12%, cereals 9.5%, and articles of leather, animal gut, harness, and travel goods

accounts for 2.6% of the total GDP in value. The category specifies that Pakistan is focusing on its cotton

and textile industry much more than the other categories. Pakistan is rich in cultivation and agriculture

sector has a competitive advantage over other countries in producing high-quality cotton products at a

competitive rates. This shows a comparative advantage of Pakistan in its cotton and textile industry.

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Source: United Nations COMTRADE database on international trade

Reasons for Comparative Advantage

Asia is the major source of cotton and textile products producing a major portion of products of the

world. Pakistan being agricultural land and a natural endowment of labor and cultivation land made the

country suitable for agricultural products (Abbas & Waheed, 2017, pp. 45-47). Due to the abundance of

cotton resources, Pakistan is among the leading exporters of cotton and textile products. Maqbool and

Mahmood (2020, pp.11-18) analyses the comparative advantage of cotton production and found out that

the farmers of Punjab enjoy the benefit of land and resources in producing high-quality cotton on their

land. Abbas (2020, pp.37-39) highlights that the textile sector of Pakistan has a cost-effective supply of

cotton for the industry to produce high-quality textile products that gives a competitive edge over their

competitors globally. This comparative advantage was investigated by measuring the Pakistan textile

industry with the global textile industries (Ali et al., 2020, pp.117-121). The major factors of comparative
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advantage are the fertile land, favorable climatic conditions, expertise, and experienced labor. Also, the

textile sector's advancement results due to the advancement, innovation, and introduction of new

commodities. Also, the country has the opportunity to maximize the export revenues by incorporating

value addition, research-oriented innovative production methods, and up-gradation of technology.

Ways to Improve Comparative Advantage

Despite the competitive advantage in the cotton and textile sector, Pakistan faces various problems and

complexities in running this sector effectively. The world economic crisis, increasing manufacturing

expenses, rising trend of the commodities, expensive power tariff, and devaluation of the local currency

are some of the soaring issues for this industry (Ullah et al., 2020, pp.87-99). Major customers of

Pakistan textile sectors include the United States and the European Union that consume almost 60% of

the total output of this sector. Due to the soaring prices of raw cotton, estimating a certain price value is

always a challenging task for this sector. Also, the energy crisis creates setbacks in production and also

raises the overall cost of production. Memon, Aziz, and Qayyum (2020, pp. 121-129) investigated the

problems faced by the textile industry of Pakistan, and the major effecting factors include fluctuation of

yarn prices, energy crises, currency devaluation, electricity crises, lack of research and development,

lack of introducing modern technology and law and order circumstances. These are the major issues that

hinder the growth of the textile sector. Since Pakistan’s economy is depending upon this sector as the

textile sector contributes almost 24% in the industrial sectors. It is necessary to take effective measures

in stabilizing this sector for effective and sustainable economic growth.

Abbas, Hsieh, Techato, and Taweekun (2020, p.230) identifies the sustainability of energy resources as

a way to stabilize this sector. It is important to understand the resources and potential of this sector along

with the available resources to utilize. Despite the low export volume, it is necessary to focus on

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gathering international customers and explore various ways to exploit various markets. Further, reducing

the production cost is a very important factor. Further, the government should take initiative to regularize

the prices of raw cotton and to maintain stability in price fluctuation to built the trust and confidence of

the exporters to quote their prices more certainly. Government should take immediate measures to

provide interrupted electricity and energy resources at subsidized rates to make the sector more

competitive in the international market (Garment Industry of Pakistan, 2017, p.6). Also, the government

should take initiative to enhance the research and development department to provide more accurate and

up-to-date research outcomes to take timely measures in the industry. Innovation and new technology is

the key to minimize cost and to make the processes more efficient. Whereas, investment in asset building

has a long-term effect on this sector. In contrast to this effect, the government should take measures and

provide subsidized loans to this sector to transform this sector into new production and technological-

based avenue. This creates a long-term binding and positive upward trend and enables the sector to

explore more international markets competitively and cost-effectively. It is of utmost importance to

identify the factors that create a downward trend in raw cotton production and new ways should be

implemented to uplift this part of the sector. This increases the supply of the raw material and also helps

the industry to maintain a steady inventory in their warehouses to meet the requirements of the customers

of various regions and locations.

CHINA

Economic Overview

China’s economy is the second-largest in the world. It is one of the largest exporters with the largest

exchange reserves. Although the economy is the largest, this economy has slow growth. The effects of

COVID-19 had devastating effects on its growth which reduces from 5.8% in 2019 to 2.3% in 2020

(Nordea, no date, p.7). Strong interest from investors and vigorous domestic consumption supported this

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development, despite rising inflation rates during a financial rebuilding drove by the Communist

government. Various projects like web-based business and online work for finances are acquiring energy

in the economy and are overwhelmed by remote area workings. As indicated by the IMF's April 2021

estimate, the patterns of GDP growth are required to bounce back to 8.4% in 2021 preceding the last

year's slump to 5.6% in 2022. Since China has suffered a lot from the pandemic issue of COVID-19, it

is struggling to regain its growth level with stability in a consistent way.

GDP Growth Rate 2021 (Trend and Forecast)

Source: Asian Development Bank. Asian Development Outlook (ADO) 2021 (April 2021)

Sectors of Industry

China’s primary sector is very much occupied with the cultivation and acquisition of raw material. This

includes farming, fishing, and oil extraction. The secondary sector involves manufacturing and processes

related to the assembly of products. Usually, raw materials are converted and transformed into various

categories for the input of the final products. China’s tertiary sector comprises all the commercial

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services such as teaching, insurance, and sales (Industries & Sectors of the Chinese Economy, no date,

p.9).

Distribution of the gross domestic product (GDP) across economic sectors in China from 2010 to

2020

Source: Statista 2021

China has currently a $1.8 trillion primary sector, which is among the largest primary sectors in the

world. It contributes 9% of the total GDP value and also contributes around 20% of the world's food

requirements. Around 30% of China’s workforce is associated with this sector. China continuously

works for the improvement, modernization, and mechanization of this sector to increase its output up to

its optimum level.

In the Western world, China gains popularity due to its secondary sector that contributes around 40% of

the total GDP value and engaging 30% of its workforce. The accessibility of Chinese products especially

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in the electronic market has seen uplift growth in the nation's wealth. China had the option to exploit

globalization. A significant interest in trades and guidelines made by the Chinese government has made

it generally simple for foreign investors to invest in China's growing secondary sector market.

Western countries usually focus on service-providing activities. China on the other hand has identified

this market position and has successfully moved to a consumption-driven economy from the previous

export-oriented economy. This shift has changed the export scenario for China. People who were

previously working for solely exports are now having the purchasing power, so the export-driven

products were purchased locally and in that way profits will be reinvested in the economy. The service

sector has elevated the middle-class society and the growth level increases in the secondary sector.

Although this growth level is not up to the level of the first-world countries, still the growth level uplift

the GDP of the economy to 51% of the overall GDP level and thus employs around 40% of the total

labor.

Breakdown of Economic Activity by Sector Agriculture Industry Service

Employment by sector 30% 30% 40%

Value Addition 9% 40% 51%

Source: World Bank Data, 2020

China Exports by Category

China’s major export contribution is in the electrical and electronics industry which contributes 27% of

the total exports. Other categories include machinery, nuclear reactors and boilers 17%, furniture,

lighting signs, prefabricated buildings 4%, Plastics 4%, optical, photo, technical medical apparatus 3%,

textile articles 3%, toys, games, sports 3%, organic chemicals 2%, articles of iron and steel 3% and

vehicles other than railway, tramway 3% of the total GDP in value. Although articles of apparel nit or

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crocheted and not nit or crocheted also includes in this category, their share is relatively low, almost 2%

of the total GDP value. The category specifies that China is focusing on its electrical and electronic

industry much more than the other categories. Also, the export values are clearly showing that electrical

and electronic products are in high demand in the world from China. China is rich in providing cheap

labor has a competitive advantage over other countries in producing low-cost products in the secondary

sector. This shows a comparative advantage of China in its electrical and electronic industry and labor

market.

Source: United Nations COMTRADE database on international trade

Reasons for Comparative Advantage

China’s comparative advantage is mainly due to its high availability of labor in its country. That’s why

labor-intensive goods can help the country in producing cost-effective products. Also, the technological

advancement has made the country to the level to create secondary products at a larger scale due to
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available land and resources in its country (Zhu, Xu, & Pan, 2019, pp. 166-175). China has developed

its economy as the largest manufacturing hub by exploiting its low-cost advantage to compete against

firms globally. The success factor resides in the abundance of low-cost labor that makes the Chinese

manufacturing industry among the top multinational companies. Especially, the high-tech industries,

China has created effective supply chain management, research and development, value chain addition,

and effective marketing strategies. This makes the manufacturing industry, especially, the electrical and

electronics industry at its boom in the world. Studies also show that China has a comparative advantage

in heavy products for the markets that are near its geographical location and an advantage on the lighter

goods for the distant markets (Ye, Cheng, Song, & Shen, 2021, pp. 23-27).

Ways to Improve Comparative Advantage

World Bank identifies that China’s trade market has not yet achieved its maturity level. Although the

trade in intra-industry is accelerated, there are still issues that need to be resolved for market integration

at the regional level. (Liu, Guo, & Zhou, 2018, pp.89-108). Basic export flows need to be identified to

enhance international trade. Trade ties and other free trade agreements need to be made to make regional

integration more effective. China needs to shift its labour surplus production to the geographic locations

of labor-scarce society. Also, it needs to turn its investments into more efficient innovation. And to enjoy

the high revenue streams, the country should implement strategies to shift its global position into an

established position (David, 2020, pp. 24-31).

The flow of Investment and Australian Benefit

Tariff concession is the main factor for Pakistan to promote its products. In the last 5 years, the export

of Cotton to China increased significantly to 166% due to the elimination of tariffs on this product. Out

of the 8 items, 6 items face high tariff rates which reduces the export potential. China, on the other hand,

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shows a high volume of intra-industry trade, whereas, the region's coalition is still stagnant. This shows

the prematurity of Chinese trade and market exploitation (Lakhani, 2020, p.55).

Australia shows higher imports of machinery including computers (15%), electrical machinery and

equipment (12%), vehicles (12%), mineral, fuel & oil (8%) as the highest imported products in 2020.

(The World Factbook Country Profiles, 2021, p.11).

Articles of iron or steel,

Furniture, bedding, lighting, signs, 2%
prefabricated buildings, 2%

Plastics, plastic articles,

3%

Machinery including
Optical, technical, computers, 15%
medical apparatus, 4%
Electrical machinery,
Gems, precious metals, equipment, 12%
4%

Pharmaceuticals, 4%

Vehicles, 12%
Mineral fuels including
oil, 8%

Among those products, few products show a rapid increase from 2019 to 2020, which include gems and

precious metals (31%), plastic products (6%), and pharmaceuticals (4%).

By analyzing the trend, Australia can make ties and free trade agreements with China and Pakistan to

align its imports cost-effectively. Reducing the tariff and making bilateral agreements, the country has

the opportunity to streamline its imports and gather the market of low-cost products for its economy.

Since, Australia is already making a fair amount of exports to China i.e. 43% of its total exports, making

effective bilateral agreements. Since, the country has negative net exports and also a deep trade deficit

especially in the items of machinery, computers, machinery parts, and dryers. The country has the

opportunity to adjust its competitive disadvantage and negative balance of trade and trade balance deficit

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with its cost-effective import strategies by making strong bilateral agreements with the countries where

the labor-intensive products are cheap to gain a comparative advantage.

Since Pakistan has entered into a Pak-China Economic Corridor (CPEC), new opportunities are arising

in this land. Australia has also the opportunity to expand its production and make agreements in the

CPEC to enter into this market. As there are new industrial zones are developing, Australia can enter

into this market and invest in the field of vehicle manufacturing, solar plant projects, and energy

resources. This can increase its chance to increase the exports from the new land opportunities (Ullah,

Khan, & Haq, 2018, pp. 77-85). There is a great chance that Australia can diversify its investment and

convert its negative net export items into positive exports.

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