The untold story of Pakistan China trade

KARACHI: Pakistan and China have increased bilateral trade agreements with the help of the Free Trade Agreement (FTA) which was signed between the two countries in 2005.

China has now surpassed the European Union (EU) as Pakistan’s second largest trading partner. As per official figures reported by the Pakistan government, the country exported goods worth $1.3 billion in 2009 to its trading partner and in turn Chinese imports stood at $5.5 billion in the same period.

As per data available on United Nations Commodity trade statistics database, the major commodities that Pakistan imports from China are electronic equipment, plastic, footwear, motorcycle spare parts, rubber manufacture and travel goods such as hand bags.

However, there are major discrepancies and variances in data with relation to Chinese goods imported by Pakistan. For instance, in FY 2008, various anomalies existed in the trade data that was reported to the UN by Pakistan and by China. This is the story on under-invoicing that is rampant in Pakistan on imports from China.

The FTA whilst having its advantages of opening up Pakistan’s access to Chinese markets also has its downside. As a result of the FTA there has been a strong penetration of cheap Chinese products into the local market such as the plastic and motorcycle spare parts industry for instance.

According to critics of the FTA the weaker country in most FTA’s must be given a more advantageous position in order to counter its local industries from the adverse impact that a stronger economy such as China has proven to have on the Pakistan economy.

Apart from the extensive misuse of the FTA signed between the countries whereby Pakistani importers submit invalid “certificates of origin” to clear non-Chinese goods from the ports in order to enjoy the benefits of the FTA, there also exists a strong case for under invoicing carried out by Pakistan importers.

Under invoicing is mainly carried out by way of preparing the invoice for the amount that the letter of credit has been established for whilst the exporter (in this case China) receives the remaining portion of the total sale in the form of bank drafts for instance arranged by the Pakistani importer through the black foreign exchange market. The practice is carried out to evade import duties that must be paid by the importer, whereby the commercial invoice is doctored to facilitate the importer on account of payment of duties and taxes in Pakistan.

A case in point would be the rampant under invoicing of motorcycle parts which in turn affects general sales in the organized sector.

Concealment of the actual value of the goods assists the importer in evading duties and also selling the imported products at a higher price in the local Pakistani market.

In 2006 the Federal Board of Revenue (FBR), formerly known as CBR, launched an investigation against the massive under-invoicing of motorcycles and their parts, and non-payment of sales tax on their registration. This historical trend of under invoicing in the unorganized sector has affected sales of the organized motorcycle sector.

Therefore, the Director General Valuation, Karachi should duly investigate the current under invoicing trend in various industries and advise the collector of customs to take action against the violators.

Other industries which are currently suffering are the also the plastics and ceramics industry. A flourishing market known as Gul Plaza located in Karachi where Chinese products are readily available is an example of the extent of market penetration of Chinese products in Pakistan.

The plaza has an array of ceramics, chinaware, plastics and electronics all imported from china at the cost of under invoicing. The local plastic industry is suffering as a result of this since the Chinese goods whilst being similar or inferior in quality are flooded in the various markets across the country.

The Ministry of Commerce (MoC) must investigate the anomalies that exist in the data reported by Pakistani importers vis-à-vis the data reported by China.

The credibility of the UN data is unquestionable and can be duly verified by the MoC and the time series of the data provided by the UN commodity trade statistics database allows rectification of any reporting errors which might have occurred on the part of both trading partners.

VAT might be a solution to the never ending tax evasion woes in the country, however an abundance of fabricated “commercial invoices” which are under invoiced result in a loss of tax revenue for the government and does not create a level playing field for local industries versus Chinese manufacturers. The Chinese have not made inroads due to tariff and non-tariff barriers in India, Thailand and Malaysia. Perhaps similar discipline is needed in Pakistan to develop industry.

Published in the Express Tribune, June 7^th, 2010.