China, Pakistan Economic Corridor (CPEC)Economy of Pakistan Term Project

Submitted to: Mam

Prepared by

Salman Siddique L12-4834

ContentsIntroduction......................................................................................................................................3

History.............................................................................................................................................4

Objectives of Pak China Economic Corridor..................................................................................7

Agreement........................................................................................................................................8

Facts and figures........................................................................................................................10

Pros............................................................................................................................................11

Cons...........................................................................................................................................12

Conclusion.....................................................................................................................................12

Recommendations..........................................................................................................................13

Law and order situations.....................................................................................................13

Favorable Balance of trade.................................................................................................14

Local currency....................................................................................................................14

Import industry rather than parts........................................................................................14

Protect local industry..........................................................................................................15

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IntroductionFree trade or globalization is the most fiercely deliberated sensation in today’s economic system

around the globe. The economic prosperity of all the nations is only possible with free trade because

every country lacks some resources as well as has some surplus resources and the deficiencies and excess

resources can only be managed by trading the resources with other countries in order to fulfill the needs

of all the nations. The observed reality is the World Trade Organization (WTO) has not been fully

successful yet in bringing trade liberalization around the globe due to multiple factors.

Free Trade Agreements (FTAs) are a sort of two-sided plan between two or more countries. FTAs

help in the free flow of trade and investment and bring about closer economic incorporation between the

parties by decreasing tariff/restrictions on each other’s merchandise. More than 60% of global trade, in

the current era is being directed through two-sided and regional trading arrangements. Currently, almost

300 bilateral, regional arrangements exist all over the world. The purpose of these FTAs is obviously

serving the economic needs of two integrating countries, but along with this, it also houses the political

motivations between them. (The recent Pak-China trade foundation is an example). Realizing the

increasing significance of FTAs, some developing countries have also entered into these arrangements.

The recently signed Pakistan - China FTA is a move in the same direction. With the growing importance

of emerging economies in South and East Asia, Asia Pacific and South America, Pakistan are aiming at

the establishment of its trade relations with the economies of those regions. Considering the fact that

China is one of the strongest economies of the world right now, as well as a fast neighbor of Pakistan, it is

about time for Pakistan to think about solidification its economic ties, apart from their already strong

strategic and military relations. It was with this enthusiasm and aim in mind that Pakistan laid the

foundation for an FTA arrangement with China in July, 2006

Right now China is the fourth largest economy of the world. It has a trade surplus of $30 billion

and foreign exchange reserve of $1 trillion. China converted itself from a centrally planned economy to a

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market based economy. At the end of 2006, China's global trade exceeded $1.758 trillion. In contrast,

Pakistan is an emerging economy having a nominal GDP of $128.5 billion, a trade deficit of $8.51 and

foreign exchange reserves in excess of $13 billion. Given the difference in the sizes and economies of

these two countries, entering into an FTA (Free Trade Agreements) arrangement at this point can lead to

very critical consequences for both the countries, especially for Pakistan. So, this writing specifically

explains the economic effects of Pak China Economic Corridors on Pakistan’s economy.

HistoryIt has been 64 years of pleasant relations between Pakistan and China. Overall, in these years China and

Pakistan have been able to evolve a compliant relationship at various heights, especially in the political,

defense and diplomatic grounds. However, both the countries have not been able to make considerable

advancements in their economic relations until recent few years. At the start of the 21st century and with

the implementation of the WTO system, both the countries understood the missing economic aspect in

their evolving relationship. Peak and China therefore became aware of the fact that in order to sustain a

complete cooperative relationship, economic collaboration and political and strategic coordination was

commanding. In the last few years, the two governments have set up a number of high-level discussion

sessions, inaugurated by their respective leadership in Pakistan and China, to promote economic

cooperation. Pakistan and China have now successfully created a clear and shared vision of the direction

of their economic relations.

Pakistan and China started their trade relations in early 1950’s and, the first formal Trade Agreement was

signed in January 1963. Later, in October 1982, the two countries established the PakistanChina Joint

Committee on the Economy, Trade and Technology. Trade between China and Pakistan had generally

been conducted under the 1963 Trade Agreement, according to which both countries had granted MFN

status to each other. At that time, Pakistan traded with China in both dimensions, i.e. barter trade and cash

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trade, but now, trade with China is done completely on a cash basis in convertible currency. Recently, the

economic relationship between China and Pakistan has come to the lead. A question is, why this sudden

interest in trade between the two countries has been explored? There are several reasons for such trade

intensity. The forefront reason is that the Chinese government has convinced its enterprises to import

Pakistani products for the improvement of the trade balance. Moreover, in the case of Pakistan, that

dependable trading partner as well as a neighbor is China. Thirdly, trading with a neighboring state like

China is economically rational and cost effective.

The Karakorum Highway was opened in 1978 but it could not be used to increase trade volume.

Moreover, an underdeveloped shipping industry in Pakistan restricted the trade routes and discouraged

the growth in trade volume. Sixth, Pakistan’s cotton based industry is the main pillar of its exports. Since

China itself is a major textile manufacturer, the trade volume could not be raised. As a result of this

renewed interest in trade relations, on May 12 2001, Pakistan and China signed six agreements and one

Memorandum of Understanding (MoU). At that time, Chinese financial assistance for the agreed projects

was estimated to be worth over one billion dollars. The agreements signed included:

Economic and Technical Cooperation

Tourism Cooperation

Lease Agreement for Saindak Copper-Gold Project

Supply of Locomotives to Pakistan Railways

Supply of Passenger Coaches to Pakistan Railways

White Oil Pipeline and MoU between China’s ZTE and Pakistan Telecommunications Co. Ltd.

On March 22, 2002, General Musharraf and the Chinese vice Premier, Wu Bang Guo, attended the

Gwader sea-port ceremony. 1st phase of Gwader port was successfully completed in April 2005, and work

on the second phase is still in progress. In the following years, there has been a regular exchange of high

level visits between the two countries and each visit added new scopes for economic cooperation.

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President Musharraf visited China in November 2003 and signed a Joint Declaration on Direction of

Bilateral Relations. It was in fact a road-map determining the direction and scope of overall Pak-China

bilateral relations in the future. In December 2004, Pakistan and China again signed seven agreements in

trade, communication and the energy sector. Pakistan announced Free Market Economy (FME) status for

China and China committed to provide $150 million for the Chashma Nuclear Power Plant (Phase II).

Also, credit of $500 million to be provided by the Chinese government for investment through Chinese

companies. China’s investment in Pakistan at present stands at US $4 billion plus, and at least 114

Chinese projects are underway. The Chinese Prime Minister’s April 2005 visited Pakistan and two sides

signed 21 agreements and MoUs on cooperation in economic matters, defense, energy, infrastructure, the

social sector, health, education, higher education, housing and other areas. The two sides also signed a

Treaty of Friendship, Cooperation and Good Neighborly Relations. Under the agreement on the Early

Harvest Program (EHP), which became operational on January 1, 2006, China has reduced tariffs to zero

on 767 items. This was the first step towards establishing a free trade area between the two countries. It

was foreseen that by the year 2008, Pakistan and China would be fully able to implement the FTA,

covering 90% of the commodities. The remaining 10% would remain on the sensitive list of commodities

and tariffs might be removed, or at least toned down, during the second round of FTA negotiations

scheduled to be held in 2011 and be implemented in 2012. During the recent visit of the Chinese

President to Pakistan in November 2006, the two countries signed 18 agreements, including a free trade

pact/agreement, which they hope will boost trade from $ 4.26 billion last year to $ 15 billion within the

next five years. The two sides have also signed a pact on a five-year plan to set up a comprehensive

framework for boosting economic ties. Pakistan provides the shortest possible route, from Gwader

through the Karakorum Highway, to the Western regions of China, which are undergoing a huge

economic transformation. This route is secure, short and can serve as an alternative to the sea route that

passes through the Straits of Malacca. Both countries have been focusing on trade interaction through this

route. Economic Effects of the Recently Signed Pak-China Free Trade Agreement 179 As a result of the

concerted efforts and determination to enhance economic cooperation between both sides, trade between

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the two countries has been registering constant growth: from $1.07 billion in 1997, to $3 billion in 2004,

to $4.26 billion in 2005, and the estimated trade volume in 2006 is at $5 billion. Therefore, in a short span

of eight years, the trade volume between China and Pakistan has increased by around $3.2 billion.

Objectives of Pak China Economic Corridor Some of the major objectives of Pak China Economic Corridor are as following

Maximum utilize the trade agreements like PTA (preferential trade agreement) and FTA

(Free trade agreement) and yield full advantage of these trade contracts

Provide a new short route for trade purposes which will approximately lessen the total

distance by 10000 kilo meters then the previous route.

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Maximize the trade volume between Pakistan and China, which will benefit the both

partners

It will also increase our exports because we will also be exporting products to china,

which will encourage the domestic manufacturing

Enhance the capacity of current high ways and add additional highways for trade

purposes between china and Pakistan

To build a strong trade alliance in south Asia

Expand trade with other countries too like Russian and Afghanistan

Providing china access to Indian ocean providing a shorter route to the china’s region

neighboring Pakistan China border

Developing infrastructure throughout the Pakistan

China wants that the Iran Pakistan gas pipeline should be extended to the northern

countries

Job opportunities for Pakistani people specially in undeveloped areas like Baluchistan

Agreement

We have seen from history that Pak China friendship is stronger day by day. China has invested billions

of dollars in the Pakistani economy to improve its living standard. So China Pak Economic Corridor

(CPEC) resulted between Pakistan and China due to these factors.

1) Improved law and order situation

2) Improved in the remittances

3) Increase Foreign Direct Investment (FDI)

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4) Political stability

5) GSP plus status

CPEC is a consortium bilateral project signed in April 2015 which connects the Gawadar Port

(Southwestern Pakistan) with the Xingjian (china’s northwestern autonomous region) via Silk rout and

Karakoram Highway. Its length is about 2442 km and has estimated overall cost of this project is 46

Billion.

The credit of this massive investment goes to the current government of Pakistan PML (N). President

visited china in February 2015. Then prime minister visited china with a delegation. Chief Minister of

Punjab also very active in this deal and make many visits to the china. When the president of china came

here in April 2015 for the inauguration ceremony of this project he says that "This will be my first trip to

Pakistan, but I feel as if I am going to visit the home of my own brother." The capital Islamabad is

decorated with signboards as "Pakistan-China friendship is higher than the mountains, deeper than the

oceans, sweeter than honey, and stronger than steel”.

All this grade welcome and reception is done because it is the biggest investment of china in oversea and

it is the real game changer for the Pakistani economy. For china it is a rout to excess Middle Eastern

countries and Caspian markets. The outline of finances is given below:

Developmental sector Estimated cost

Infrastructure 11 billion

Energy 35 billion

Total 46 billion

There is a dam named as BUNJI DAM which is constructed by China collaboration to overcome the

energy crisis. It is main reasons for economy failure. We don’t able to meet the requirements, demands

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and quotas of GSP plus status which leads to removal of this status. That’s why 35 billion invested on

energy sector to increase the production and capacity of electricity. At the end it is the WIN-WIN

situation for both the countries. China gets cost benefits. This is decreased from 3626 miles to 2295 miles

and it will save China’s fuel consumption and cost to one-third of the current level (6.3 million barrels of

oil).

Facts and figures

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This graph wisely shows that the export and import are increasing on yearly basis and this estimate shows

that Pak-china crosses 15 billion dollars. The balance of payment (net export) is surplus with china trade.

The largest investment of china in Pakistan during 2004-2005 is in construction sector follow by

transportation sector. This shows that china is aggressively interested in the investment of Pakistani

economy because Pakistan is a gate to enter to gulf state and Cespean markets.

Pros

1) Improved the social, political, technological and economic situation of Pakistan

2) Improved the GDP

3) Increases the opportunity for employment and living standards of life

4) Decreases the demand-supply gap

5) 16,000 MW generation of electricity from CPEC

6) Give a boost to the industry and economy

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Cons

1) Biasness in the project as faster construction is done in northern part as compared to the

Baluchistan and Khyber Pakhtunkhuwan.

2) Power crisis may hurdle efficiency of this project.

3) Security problems from Tehrek-i-Taliban for Chinese engineers and workers.

4) China Punjab corridor instead of china Pakistan economic corridor called by Sindhi and Balochi

5) Structural problem and nepotism causes more poverty in Baluchistan.

Conclusion

No doubt that the CPEC (CPEC) will provide new opportunities and new possibilities for

the economic development of Pakistan and China. But there are also some implications in this

like law and order issues in Pakistan but all in all it’s a project of great importance especially for

Pakistan. We can conclude it as following

It’s a gateway for china to expand its trade using a short routes to the gulf and African

countries

This program faced challenges throughout its life like killing of Chinese engineers etc.

but still both countries show mutual co-operation and did not allowed these factors to

disturb their economic co-operation

Job opportunities are being created in Pakistan

An easy to access export market for Pakistani products which got massive potential

because of its huge population

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Development of infrastructure in Pakistan like building of roads dams and even a railway

tract is under consideration

China is helping Pakistan in fighting energy crisis in Pakistan by building dams and

power stations

China and Pakistan both countries are expanding their trade activities and more over they

are determined to enhance it in future and increase the total trade volume of trade in

Pakistan and China

Proper protection of Chinese workers working in Pakistan should be assured

This project is providing immense opportunities to Pakistan. We should not ignore the potential

of this project and should make sure the stability of this project. Complete and ideal

implementation of this project can be a game changer for the economy of Pakistan.

Recommendations

Nothing is perfect in world and CPEC is no exception. Space for improvement is always

present as this trade alliance is so important for Pakistan so for improving it and to make it more

sustainable following are some suggestions

Law and order situations

Law and order situation in Pakistan should be improved so that

more Chinese investors show interest in investing in Pakistan.

More over the safety of the Chinese labor in Pakistan should be

insured.

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Favorable Balance of trade

Favorable balance of Trade should be maintained between imports

and exports as the imports from china is far greater than exports to

china. Exports to china are 3.1 billion and imports from china are

of 9.3 billion dollars which is almost triple of the amount of our

exports. So system should be designed so that the imports and

exports are balanced importing more have adverse effects in

economy

Local currency

Trade should be done in local currency so that the local currency becomes

stronger rather than U.S dollars

Import industry rather than parts

Rather than importing parts from china we should promote Chinese

business to start manufacturing in Pakistan. Instead of assembling plants,

manufacturing plants should be built in Pakistan, but for that purpose we

have to provide better opportunities to Chinese investors what they

already have in their home country which is a difficult task.

Protect local industry

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We should also keep in mind the adverse effects of this collaboration on

local industries. We should restrict the products exports from china which

can harm our own domestic industries. Exports of only those products

should be encouraged which have minimum effect on local industries and

products that have effect on local industries should be discouraged.

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