China needs to invest overseas to help digest its domestic excessive production capacity while Pakistan is in dire need of foreign direct investment
According to media reports, Chinese president Xi Jinping’s Pakistan visit is expected this month. This well-awaited visit was twice postponed, costing our relations to the country dearly. China and Pakistan have enjoyed unparalleled political and strategic relations since the early 1960s. Most Chinese call Pakistan an “iron brother” and Pakistan terms China a “pillar of its foreign policy”. However, despite a strong understanding on the political and diplomatic levels, economic relations have remained far below their actual potential. This is in spite of the fact that the two countries have geographical proximity and road connectivity, the two sides have granted each other most favoured nation status and have signed the Free Trade Agreement (FTA).
Pakistan was the first country in South Asia to enter into an FTA with China. Even though this two-way trade has improved from over a billion dollars at the start of the new century to an estimated $ 14 billion in 2014, it remains dismal compared to China’s trade with other countries, especially India, which has surpassed $ 60 billion per annum. In a globalised world where economic considerations overlap strategic considerations in inter and intra-state relations, Beijing and Islamabad need to give serious thought on how to expand their economic and trade ties.
A look at the relationship points to a number of factors behind the low trade and the trade deficit. For instance, Pakistan’s colonial legacy, western orientation of its businessmen, language barrier, lack of meaningful economic reforms, political instability, limited export basket, law and order situation (which has worsened post-9/11) and China’s controlled economy (till the late 1970s) have all contributed to low trade exchange. If one compares Pakistan’s exports to China’s during the 1950s with the current export items, one finds hardly any major change in trends. Most of Pakistan’s exports to its northern neighbor have revolved around agricultural and leather products, sports items and raw material. On the other hand, Chinese exports to Pakistan are high-tech finished products. In addition, Pakistan’s simple commodity trade structure, limited service trade market, low level of investment and interference of non-economic factors also contributed towards the low economic relations. Last but not least, the increasingly deepening economic relations, interwoven with the process of domestic political reforms and economic development of the two countries, has led to symbiotic issues related to security. In this respect, both states have to stabilise their border areas, preventing foreign subversive forces from manipulating domestic ethnic conflicts.
Moreover, both countries are facing the challenges of economic structure adjustment and developmental transformation. Hence, they need to get rid of the negative impact of the international macro-economy, especially the energy security risks. The mentioned problems cannot be addressed without the reconsolidation of economic resources and coordination in macro-economic areas between the two countries. At present, a regional framework that can reflect new trends in bilateral economic cooperation and can properly solve the bellowing symbiotic issues is lacking.
The newly conceived China-Pakistan Economic Corridor (CPEC) fills this gap. The corridor can act as a regional institution to boost bilateral relations. Against the commonly misunderstood impression that the CPEC is a land or rail connectivity passage between the two countries, the CPEC is indeed a comprehensive concept that encompasses economic and strategic integration between the two countries in the long run. Furthermore, the CPEC is the name of regional economic integration beyond the geographical route; it represent the domestic institutional arrangements and macro-economic coordination between the two countries in the transnational flow of economic factors such as capital, technology, information and labour.
Considering the weak infrastructure in Pakistan and western China, the first task of the CPEC should be the construction of transport links to establish connectivity and make economic factors move along smoothly. But this does not mean the CPEC is only a simple geographic line or that the spin-off projects will only be implemented along that route. In fact, the corridor promotes cooperation in all areas by drawing upon experiences gained on key points. Here it is important to mention that Pakistan’s economy is highly complementary to that of China and exists in a win-win cooperation of investment, technology, human resource and energy. For instance, China needs markets for its products and searches for raw material. Pakistan needs access to technology and equipment to boost its industrialisation process while it has abundant untapped raw material. Second, China needs to invest overseas to help digest its domestic excessive production capacity while Pakistan is in dire need of foreign direct investment (FDI). If China invests in Pakistan, it will reverse the foreign debt trap in Pakistan. Third, China has been facing long-term foreign trade surplus, with a large number of foreign exchange reserves for the purchase of not-always-deserving US bonds. It looks for a more effective channel to use foreign exchange funds. In contrast, Pakistan has been facing an imbalance in its international payments. Fourth, China has become an aging society. Pakistan on the other hand is one of those countries with the highest youth population. By giving Pakistani youth basic training and skills, it can be positively consumed in China’s industrial sector and the chain of production. Fifth, because of the significant geopolitical position, Pakistan can help China in the construction of transnational energy channels to diversify energy imports. This will also complement Pakistan’s own energy imports mechanism.
Thus, economic cooperation between Pakistan and China is not only complementary in areas such as capital, technology, labour and energy but also pushes for the integration of their economies. This complementing, it is argued, can form a virtuous cycle between the two countries leading to sustainable economic development. This is the essence of the CPEC, which is not mere connectivity but comprehensive economic and strategic integration. Based on this economic integration, the two countries could develop closer economic ties and build transport links as the core of infrastructure construction, industrial division as the core of economic structure coordination, currency unity as the core of the financial system and, finally, policy coordination as the core of the decision-making mechanism.
Undeniably, the construction of the CPEC also faces some challenges, which should be addressed wisely especially on the Pakistani side. The key point may be to fully assess the risks of construction, carefully make risk-avoiding programmes and put them into effect at an early stage. In summation, China and Pakistan have a lot to learn and share. This was precisely discussed and understood at the recently held Pak-China business forum too. Nevertheless, any economic exchange should transform into retributive justice so that the poor remains the priority.