On November 18, 2014, in a statement published on the PPI website, Kashmir Affairs and Gilgit-Baltistan Federal Minister Chaudhary Muhammad Barjees Tahir claimed that the China-Pakistan Economic Corridor (CPEC) will bring about $70 billion annual revenue in the form of transit fee.
Reportedly, he also said that, Pakistan will be turned into a transit economy soon after the completion of this trade route based on a re-routing of Chinese exports of more than $2 trillion.
This figure of $70 billion may be highly speculative for the scope of Pakistan’s economy, where the size of federal budget in 2015-16 was a little over $40 billion, the level of foreign exchange reserves were less than $20 billion and exports barely exceeded $25 billion.
Regardless, this reported statement indicates that the Pakistani government may have considered levying a transit fee on Chinese cargo to be transported through the CPEC on Kashgar-Khunjrab-Gwadar route.
Benefits to China
The CPEC is well-aligned with its strategic vision of China to enhance its access to the global market through the Indian Ocean by building a new 3,000 km road, railway, pipeline optic fiber and a new deep see port network through Pakistan. At present, China’s link with Europe, Africa and the United States, which contributes largely towards global trade, is through the Strait of Malacca in the South China Sea.
Therefore, the development of the trade corridor through Pakistan would provide an alternative route for Chinese trade to reach the global markets of Middle East, Africa, Europe and the US. Additionally, this will also enable it to secure vital oil imports which mainly originate from the Middle East. According to an estimate, the new route is likely to reduce the distance from Western China to Eastern Europe by at least 10,000 miles.
On the other hand, Pakistan eyes the increased expected flow of foreign direct investment, technology, cultural linkages, loans, and know-how from China and pegged its expectation with its offer to facilitate China by providing an alternate trade route. However, these returns are subject to presence of several other supportive factors.
The transport and communication infrastructure of CPEC will be largely financed by Chinese loan – to the tune of $11 billion – except the newly declared grant of $230 million dollars for Gwadar International Airport. Thus, Pakistan will be ultimately paying back this loan at varying interest rates over a course of the next few years.
In the 2015-16 Public Sector Development Programme (PSDP) at least four PC-1 for CPEC transport and infrastructure sector have been included. These are, Karakorum Highway (Havelian to Thakot), Karachi-Lahore Motorway (Multan to Sukkur), Gwadar port East Bay Expressway Project, and Gwadar international airport (now converted into Chinese grant and therefore tenders have been called off). These projects will be financed by the Chinese loan with a 10% Pakistani counterpart funding.
Transit fee mechanism
Given the relative certainty about construction of transport and infrastructure network, Pakistan’s government may want to consider the idea of levying transit fee more seriously. The general rationale of a transit fee is very simple. Transport corridor’s purpose is to provide for efficient means of carriage of goods and services in transit with minimal damage to the goods and their quality. Where there is damage, it provides facilities for insurance surveys as well as for lodging claims. Having done so, the transit economy collects transit fees for services rendered.
More specifically, the transit fee on Chinese goods makes sense because it is a cost China will be saving each year in addition to significant reduction in time and cost of shipment. Additionally, the transport and infrastructure network is being ultimately financed by the public exchequer; therefore some return should be seen.
Pakistan has promised to provide security to the Chinese workforce for which it is deploying 10,000 strong specially raised security force.
International law states countries are not allowed to charge fee in the case of land-locked states, China is not a land-locked country.
It leads to the conclusion that levying a rational and business friendly transit fee may be the only tangible benefit that Pakistan will realize through CPEC.
It is imperative that the government should conduct detailed deliberations on signing a bilateral transit trade agreement.
The writer is founder and executive director of PRIME Institute, an independent think tank based in Islamabad
Published in The Express Tribune, November 16th, 2015.
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