Pakistan, RCEP and an integrating Asia

Only a few years ago when CPEC was launched, it was hoped that it would usher in a new era of industrial cooperation between Pakistan and China. The special economic zones (SEZs) would provide the well-needed state-of-the-art industrial infrastructure, with world-class regulatory environment, hosting industries from China and beyond, promising technology transfer and industrial upgradation. The second phase of China-Pakistan Free Trade Agreement (CPFTA-II) was supposed to provide the much-needed preferential access for Pakistan to the world’s largest consumer market. And the more ambitious of us thought that it would be Pakistan’s gateway to global value chains, finally redefining the country’s industrial capabilities.

Six years after CPEC launch, however, these dreams remain unrealised. Although at least three SEZs are under development and CPFTA-II has been signed, we still have to witness large-scale relocation of industries from China. This lack of progress can be attributed to our snail-paced bureaucracy, the pandemic, Pakistan’s own economic crisis and recent changes in our foreign policy.

But while Pakistan is reconfiguring its approach towards CPEC, the world has not been standing still.

On November 15, 2020, 15 countries — 10 ASEAN members as well as Japan, New Zealand, Australia, South Korea and China — signed the Regional Comprehensive Economic Partnership (RCEP) agreement. RCEP encompasses 29% of world’s GDP, 27% of global trade and one-third of world population. This mega-regional partnership is expected to bring East Asia together in terms of trade and economic cooperation like never before.

In particular, the unified rule of origin under RCEP would mean that products manufactured as per the RCEP-originating criteria will be able to move freely within the bloc, with only a single certificate of origin, significantly reducing time, complications and costs of managing regional value chains (RVC). This will make these countries more integrated and competitive, in turn attracting more investment.

But as East Asia will reap the benefits of this deep trade integration, what will be its implications for Pakistan?

With RCEP countries becoming more competitive, Pakistan’s relative market access to these countries, especially China, could suffer, leading to loss of exports to regional competitors. Considering that almost one-sixth of our exports are destined for RCEP countries, such erosion could be significant.

Moreover, as RCEP members become more attractive for investment on the back of improved competitiveness, Pakistan will become relatively less attractive for FDI. Pakistan’s FDI inflows have been declining after CPEC infrastructure investments have dried up and this could take a further toll over the next few years.

Most importantly, in the longer run, as the world is organising itself into new trade blocs, Pakistan could be isolated and lose out on the longer-term benefits of trade integration.

But with new challenges also come new opportunities. The RVC under RCEP will still have opportunities for other countries to plug in. The threshold for regional value content under RCEP is 40%, which means that there would be space to have 60% content from elsewhere and still qualify for duty-free treatment within the bloc, which could provide a gateway for Pakistan to plug into these strengthened RVC.

Furthermore, RCEP will be open for accession by any country and will therefore provide an opportunity to Pakistan to join, especially with China’s support.

If Pakistan chooses to join RCEP, it could be a new start for the country towards embracing trade integration and putting an end to inward looking protectionist policies. But in order to benefit from RCEP, first we have to become more competitive, which is easier said than done.

RCEP offers both a glass half full and a glass half empty for Pakistan. It depends on us how we choose to look at it. But closing our eyes to these transformational changes around us are no more an option.

Published in The Express Tribune, April 27^th, 2021.

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