Free trade is a theoretical framework that allows trading partners to import and export goods and services without any sort of barriers and restrictions. Free trade is, in fact, a trade policy under which governments impose no restrictions, whatsoever, on imports and exports to each other on the basis of comparative advantage. Free trade agreements (FTAs) are treaties under which the countries regulate their trade by waiving off specific set of duties, taxes and tariffs apparently to get maximum benefit out of their comparative advantage positions. What are advantages and disadvantages of such free trade arrangements for the countries like Pakistan and what are the best practices that could be quoted as examples to be followed in the world?
There is no denying the fact that it is a competitive world and almost all countries of the world are in a race to get maximum out of their trading partners. The ways and means to get maximum benefits may vary but the goal is only one to achieve a healthy social and economic development. The Free Trade Areas or Agreements provide ways and means to improve trade benefits in the form of better economic outlook and growth through technology transfer by less government spending. It creates economic efficiency, less corruption and less subsidies ensuring economic growth. But it entails side effects of jobs outsourcing with poor working conditions and degradation of natural resources. If we go deep into the analysis of such agreements, we find these contracts useful in one way or the other but at the same time having their own implications for the economy.
Almost all countries of the world are engaged in some sort of trading blocs in the form of free trade and preferential trade agreements. Free trade areas and regional trade organizations or associations are further diversification of such trading blocs. Pakistan is also part of such arrangements, as we have signed FTAs with China, Sri Lanka and Malaysia; while enjoying preferential trade agreements (PTAs) with Iran, Indonesia and Mauritius. Pakistan is also part of South Asia Free Trade Agreement (SAFTA) under the auspices of South Asian Association for Regional Cooperation (SAARC) and has a Transit-trade agreement with neighbouring Afghanistan. Pakistan is also going to sign Transit-trade agreement with Uzbekistan soon opening gate for trade with Central Asian Republics. Pakistan and United States have also a Trade and Investment Framework Agreement (TIFA) for promotion of trade and investment as part of larger arrangement to attract investment.
There are numerous free trade areas, organizations and associations promoting trade and investment in the world. Free trade areas generally consist of countries or group of countries having no tariffs and non-tariff barriers in and amongst the member countries but have their own trade policy with non-member countries depending on their own relations with those countries. The best examples of such areas are North American Free Trade Area (NAFTA), the European Free Trade Association (EFTA), China backed Regional Comprehensive Economic Partnership (RCEP) etc who have almost zero taxes and duties on most of their goods and services within their own territories.
As we know that China backed group of fifteen Asia-Pacific economies excluding United States have formed recently a world’s biggest trading bloc called as Regional Comprehensive Economic Partnership (RCEP). The RCEP was signed as trade pact on the occasion of online ASEAN summit in Hanoi on November 15, 2020 paving way to cement China’s economic partnership with Southeast Asia, Japan and Korea. Interestingly, the United States has gone into isolation by not becoming member of RCEP and TPP (Trans-Pacific Partnership) consisting of the fastest growing biggest economies of the world. The India at the last moment also pulled out of this partnership but RCEP member states have kept open doors for India to join any time at its own convenience. According to one estimate, the RCEP will account for 30% of global economy having 2.2 billion consumers on its list that is almost 30% of world’s population. Its objective is to progressively reduce duties and taxes and to get away with non-tariff barriers to promote trade and investment in their member states, which provide a great deal and opportunity of economic growth and development in the region.
If we look at world trade scenario and free trade regimes, the role of World Trade Organization (WTO) seems to be very important and crucial. It started with General Agreement on Tariffs and Trade (GATT) and reached at the consensus formation of WTO via long sessions of Doha Talks but is still under clouds owing to multiple reasons. The WTO is generally considered closer to the concept of open and free trade institution in the world, although it only provides a system of rules and regulations to run free and fair trade without distortions, so that competition and innovations may not hamper efficiency in trade and trade products. The WTO is also considered as ploy of developed world that is being used for exploitation of developing countries as their consumer market and is working on the whims and whimsical directions of those who dictate the world trade. But fact of the matter remains that WTO is the only international trade organisation dealing with the global rules of the trade and its functions include but not limited to secure and ensure smooth and free flow of trade in the world without harming the interest of global consumers.
Now coming towards Pakistan and its trade dynamics, we see various arrangements made by the government of Pakistan in the past and evolved a mechanism to achieve best of the results for trade promotion, but could not succeed to enhance its exports, which are backbone of the economy in any country of the world. Pakistan’s total trade volume is accounted for more than $75 billion out of which our exports are hardly touching $24 billion mark. Further, our main exports are textile and textile related products. The reasons are varied and myriad in nature, which can be discussed at length in the ensuing details of Pakistan’s trade.
As we all know that Pakistan is a developing country with limited resources facing disruptions and inconsistent trade policies due to mismanagement of various political regimes in the past. The political developments in Pakistan have been a constant source of disturbance and proved to be main hurdles in economic and trade development policy framework, especially imports, exports and balance of trade facing a lot of challenges and were badly disturbed. The free trade agreements are still to be tested so far as results are concerned, whether they are beneficial or adversely affecting our trade.
The FTA with China has entered into the second phase of its implementation and Pakistan wants to go along with it whether in favour of our exports or not owing to strategic interest entrenched in our cooperation with China. Pakistan is almost trading 313 tax free items with China, which will be stretching over to 5,000 such items in the coming five to ten years time under FTA arrangement. The trade volume has significantly improved with China as it has surged from almost $4 billion in 2004-5 to over $20 billion now in 2021. The balance of trade is definitely not in favour of Pakistan, as we are lagging behind in all respect of our industrial infrastructure and exportable products. But we have achieved a reasonable level of trade partnership with China, which will be improving in the coming days and months. Pakistan is mainly exporting stone, salt, sulphur, sugar confectionary, fish, molluscs, invertebrates, ores slag and ash. There are other items as well like meat, dairy products, oil, fresh and processed fruits, which are in high demand by Chinese importers. But all in all, we are running trade deficit of about $17.5 billion so far as trade with China is concerned. Questions are naturally arising as how to improve trade balance with strategically important country in the presence of FTA that allows both of the trading partners to get maximum out of it?
The only way forward is to get more ingress into the Chinese market through aggressive campaign for tradable items by our commercial councillors and diplomats. China is a big market and we can export so much by diversifying our exportable items. Need of the hour is to adopt aggressive economic diplomacy all over the world through our foreign Missions, especially China, United States, Malaysia, Iran, Middle East, Central Asia, EU and Africa being the main potential trade partners.
Like China, we are in a great trade deficit with Malaysia with whom Pakistan has signed FTA. But the question is whether Pakistan is benefitting from FTAs or we are at a loss due to our own shortcomings of weak industrial infrastructure having nothing diversified exportable items to these countries. One is compelled to say that our own weaknesses are more contributing towards our trade deficit than to malign free trade arrangements, which could be beneficial in case of robust industrial infrastructure and diversified exportable products. It all depends on the comparative advantage of the country like Pakistan to extract maximum benefits from FTAs, which is not a bad option if we are not benefitting from regional trade arrangement like SAARC owing to Indian obduracy. But we are already getting maximum benefit from FTA with Sri Lanka due to compulsorily attached advantages for such free trade arrangement.
The preferential trade agreements are contributing maximum in trade development of Pakistan, especially trade with neighbouring Iran. Although volume of trade is not much due to sanctions against Iran but there is a lot of potential of exports and barter trade. The main exports to Iran are meat, rice, cotton, agricultural products and imports from Iran are mainly petrochemicals, steel and liquefied petroleum products. The trade can be enhanced by removing tariffs and non-tariff barriers and it can prove to be a win- win situation for both countries. It also applies to Turkey, where a lot of cooperation is already under way to enhance trade in merchandise through such arrangement.
The US-Pakistan Trade and Investment Framework Agreement (TIFA) signed in 2003 was, in fact, meant to create jobs through economic growth by enhancing investment in various sectors of economy. The objective of this agreement was to expand bilateral trade and investment in goods and services. The growth model through this framework was envisaged to enhance digital trade, improve business climate, strengthening intellectual property rights as well as aiming at women empowerment, labour reforms and skill development for workers. The U.S is one of the largest markets for exports of Pakistani goods and services, so it could possibly be the main destination for Pakistani products to enjoy truly international exposure. It is not out of place to mention here that currently Pak-US trade volume is touching over $ 7.00 billion.
To put it in a nutshell, there are advantages and disadvantages of free trade for countries like Pakistan. If we weigh the pros and cons of free trade arrangements, the advantages are more than disadvantages owing to multiple reasons, especially the competitive world creating efficiencies enhancing exports resulting in overall economic growth and development. When trade barriers are removed, the manufacturers compete with each other directly and market forces compel them to become increasingly efficient to capture more of the market share to earn profits. That’s how the free trade creates a competitive efficient markets resulting in economic growth.
(The writer is an economist and bureaucrat working for the National Commission for Human Development)