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Under FTA and PTA Agreement: Importance of trade with China, Iran, Turkey and Sri Lanka

Published on 17th Aug, Edition 33, 2015

 

PTA is a bilateral agreement signed between two trading countries to trade certain products at reduced tariff and let go of them completely to ensure buyers of one country import from the other. Signing of PTA or FTA with any country will promote trade and foreign currency movement. The larger banks e.g. UBL, HBL , ABL, MCB and NBP are expected to lead the way with RMA arrangements to facilitate trade. Some of the stated banks have branches located in these countries and have the capacity to open more branches if need arise. Having a local branch also assists in facilitation of trade and confirmation/routing of LCs. Through PTA and FTA is being used interchangeably, the difference between the two is as follows:

PTAs serve to reduce tariffs but not completely eliminate them. FTAs often eliminate tariffs completely

TAs are the starting point of economic integration between the two countries. FTAs are the final goal

PTAs can also involve agreements where one party is itself a PTA, such as in the case of various agreements signed between the European Council and several other European and Mediterranean countries. There can even be PTAs in which all parties are PTAs, such as the EC-MERCOSUR agreement under discussion

Generally, PTAs, unlike FTAs, do not cover all trade

With respect to the banking channel, many banks in Pakistan already have existing RMA agreements with various banks in the above stated countries. Even if a bank does not open a physical branch in country where Pakistan has an FTA or PTA arrangement, trade can be facilitated through RMA or advising an LC through a bank who has the relationship. Trade facilitation with respect to PTA or FTA doesn’t seem an issue

Pakistan has so far has signed four FTAs under the South Asia Free Trade Agreement (Safta) with China, Sri Lanka, Malaysia and India. Besides, there are three PTAs with Iran, Mauritius and Indonesia. After these agreements, bilateral trade volumes with these countries increased substantially, but mostly increased trade imbalances for Pakistan. Pakistan is still pursuing the conclusion of a PTA with Turkey. Talks for this were initiated in 2004, but no consensus could be developed over the modalities and lists of items for trading between the two countries, despite their friendly relations.

 

Export with china set to increased

China is the largest player for Pakistan in terms of trade and many products are imported from China to take advantage of lower price. Textile benefited the greatest through export of Yarn and Fabric to China. In fact the Yarn industry claim to be dependent on China for its exports. Since Pakistan is a net importer, any trade agreement such as with China would result in higher imports than exports since Pakistan finds it difficult to compete with regional players such as Sri Lanka, Bangladesh, India, Burma, Indonesia, Myanmar etc. Exports to China since signing of the agreement in have increased and expected to reach 250 million in CY15 whereas imports is 15 times that of export resulting in trade deficit the more the trade increase.

The government is planning talks with China to revisit the tariff structure of certain products which will give exports a boost, unfortunately, any such measure may have a counter affect on imports for which traders will not be pleased. The issue with Pakistan is that other than agriculture where the country is self-sufficient, Pakistan imports all raw materials and is unlikely to ever be in a position where exports equate imports or higher than imports. Through signing any PTA or FTA agreement with be beneficial, higher imports will eventually result in devaluation of currency, which will make import expensive, hence any advantage to be derived through FTA or PTA agreement will be lost. It is the very same reason why Pakistan obtains minor benefit of such agreements. If the government does intend to revisit the tariff structure, such a measure would result in delays and mutual consent from both countries and stake holders which is expected to take time as seen with Turkey.

With possible removal of Iranian sanctions, the Pakistan-Iran FTA is also in the pipeline and expected to increase the flow of oil and commodities including textiles. The government in 2012 estimated that trade with Iran will be USD 5 billion approx. Pakistan has been declined FTA approvals from several European countries on the grounds that Pakistan did not agree to open the automotive sector, which is under control of the Japan. With Europe, Pakistan would have witnessed growth in variety of cars available to local customers.

With respect to Pakistan, the advantage of any such agreement is an increase of trade whereas the disadvantage is negative balance of trade. In addition, PTA or FTA is beneficial for those countries who have a competitive advantage and can pursue trade by tapping into its competitive advantage, something where Pakistan can produce better quality at a lower price. This is where the textile and agriculture sector much play a key role to increase export trade else the gap between balance of trade will widen. On the flip side, any tariff advantage could help Pakistan produce cheaper than other countries for export. Unfortunately we have witnessed factors which as exchange rate , cost of doing business which has not resulted in exports to its potential. The government mush invests in farmer training and farm mechanization. The biggest advantage of Pakistan is our food security where Pakistan is self-sufficient with its food supply. This competitive advantage could help boost exports and narrow the trade deficit.

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