A closer look at the China-Pakistan Free Trade Agreement (CPFTA) to targeted at specific products for trade and opening avenues to liberalize services shows that this deal may not affect Indian businesses or trade with China or Pakistan.
The CPFTA allows duty-free market access for Pakistan to sell 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. The Chinese have also agreed to cut existing tariffs on fish, dairy sectors, frozen orange juice, plastic products, rubber products, leather products, knitwear and woven garments by more than 50%. The agreement will give China market access to machinery, organic and inorganic chemicals, fruits & vegetables, medicaments and other raw materials for various industries including engineering sector, intermediary goods for engineering sectors.
The reason why Indian companies do not worry too much about this deal is because about 60% of Indian exports to China are raw materials such as iron ore and minerals driving bilateral trade growth of 30% valued at USD 17 billion. Other than this, the other items include textiles (cotton yarn and fabrics), leather and leather products, chemicals, pharmaceuticals, automobile components, metals, and structural materials. While some of these items show up on the list of exports to Pakistan, analysts feel that the Pakistani exporters are not direct competitors.
Indian commerce ministry says that Pakistan is more interested to sell primary goods such as dry fruits while exportable Indian goods are far more diversified. It is not clear how the Commerce Ministry can dismiss the threat out of hand when a majority of exports from India are only raw materials (and in fact more basic and less value added than processed dry fruit). Given that future growth will be only in these sectors since Indian companies have restricted access to Chinese markets, the basis of export expansion projections from the Commerce Ministry is unclear.
Moreover, with the CPFTA, Pakistan can be used by China to flood the SAFTA market by Pakistani agents or agencies. To say that India has to compete with Pakistan anyway under SAFTA is being blind to the fact that the new products that could flood the markets may be of higher quality and much cheaper. In addition, China is also investing heavily in a Special Economic Zone (SEZ) outside Lahore where many Chinese products will be manufactured and meet the 35% value add by Pakistan requirement. Therefore, it is incomprehensible that the Commerce Ministry does not want to initiate action that could stave off this threat.
While Indian exports to China may not be threatened by Pakistan, the unfettered access China will now have to the SAFTA region is serious especially for higher value goods such as machinery and industrial equipment.
Therefore, it is important that India monitor future exports from Pakistan of high-end goods and also develop economic intelligence of Pakistan and specifically the Lahore SEZ. It needs to demand mechanisms whereby Pakistan can prove that it has added value by at least 35% of cost to take advantage of SAFTA regime.