CPEC and China’s food market

CPEC is expected to lead to a reduction in logistics costs but will not automatically translate into greater exports

In an earlier article, I highlighted the enormous opportunity of China’s $160 billion agricultural imports and $1 trillion-plus food market, with Pakistan’s negligible share. Can the China-Pakistan Economic Corridor (CPEC) change this?

While CPEC is expected to lead to a reduction in logistics costs, this will not automatically translate into greater exports. Market access requires an examination of tariff and non-tariff barriers to trade too. The second phase of negotiations of the Pak-China Free Trade Agreement (PCFTA) are now under way. These negotiations were long overdue and considering our inability to make use of the first phase signed in 2006, our domestic industry has a number of concerns.

Nevertheless, the question remains: what we should negotiate for and how we can benefit from this huge opportunity. Recently, I was involved in conducting some research on the subject, as part of a team sponsored by International Growth Centre. Our research attempted to provide some of the answers in Punjab’s context.

Let’s look at Pakistan’s agriculture exports. Textile and clothing make for more than half of our exports, followed by vegetables, accounting for 14%. Food products are the fourth important item in Pakistan’s exports, constituting almost 4%. As we can see, that not only bulk of our exports is reliant on agriculture but the top two food categories account for almost one-fifth of our exports.

Digging a bit deeper on our agricultural and agro-processed exports, we found a well-diversified basket of $4.06 billion, excluding cotton and livestock. Now out of this $4 billion+, how much do we export to China? Only a third of a billion dollars, with rice taking more than half, followed by the ‘beverage, spirits and vinegar’ category, which takes another one-third. Although Pakistan’s agricultural exports to China spread over 14 broad product categories, most of them are very small or negligible.

What is even more interesting is that China imports $76 billion worth of goods in these categories, with Pakistan claiming merely half a per cent share. Since we are exporting these products elsewhere, we must be somewhat competitive and since China is importing them, we know that there is an established market next door. So, what exactly is happening here?

Let’s look at the example of rice. Pakistan is one of the top five world exporters of rice. Our rice exports of $1.9 billion in 2016 represented 5% of global rice exports. Rice exports to China, however, accounted for only 8% of this. On the other hand, China imported $1.4 billion worth of rice, with Pakistan getting only 11% share. From where did China get the rest? Mostly Vietnam and Thailand with 3-5 times more rice exports than Pakistan.

Despite the fact that the bulk of China’s imports is in non-basmati rice, there is still significant room to increase our exports. But the major impediment is non-favourable tariffs. China maintains a special low tariff of 1% on import of a quota of 5.3 million tonnes of rice, however, beyond this quota, rice imports are subject to a tariff of 65%. The Asean countries, which are the top exporters of rice to China, enjoy preferential tariffs as a part of Asean-China FTA — 20% on non-basmati and broken rice and 50% on tariff in basmati rice. In case of Pakistan, no preferential tariff is applicable on any rice category, making us non-competitive.

The story of rice is not the only one. Similar stories are there in other product categories such as citrus, fruit juices, vegetables, etc, where either tariff or non-tariff barriers are hindering our exports to China that would otherwise be made.

Such insights should drive the ongoing PCFTA negotiations with China. Fortunately, Punjab has taken up many of these issues with the federal government but other provinces need to do the same. And this exercise should go beyond agricultural products. The state can pave the way by negotiating better terms of trade for Pakistani exporters, while businessmen should explore why they aren’t exporting more.

Once we tap these opportunities, we could look for other high demand areas in China, where we can potentially develop production capabilities from the scratch. But that remains a story for another day.

Published in The Express Tribune, September 29^th, 2017.

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