Impact of CPEC on Trade Structure and Regional Competitiveness of Pakistan Presentation at Applied Economics Research Centre University of Karachi

China Pakistan Economic Corridor (CPEC) CPEC is a long route passing from various backward areas of our country. About 22% of the total CPEC investment (46 billions) is dedicated to connect Kashgar city of Xinjiang, China to Gwadar, Pakistan through a road network. China Pakistan Economic Corridor (CPEC) is viewed as a big push to economic development of China and Pakistan.

Expected socio Economic Benefits of CPEC Increase connectivity among regions. Open markets for trade. Increase accessibility to health, education and socialization opportunities. Generate connectivity across provinces Concentration of economic activities Urbanization process will change the socio-economic structure of these regions. Establishment of an alternative sea port.

A Word of Caution Despite of the enormous expected benefits of CPEC via urbanization and localization economies, the threats from it should not be left unheard. Pakistan and China are common exporters of a number of goods and hence with CPEC the concerns about export structure of Pakistan have risen.

Objective This research has estimated revealed comparative advantage and growth trends of such common goods to evaluate the impact of CPEC on trade structure of Pakistan. An index was calculated for seven commodities, thirteen years and two countries i.e China and Pakistan. Further the decline in cost to export per container per kilometer is calculated for China by using this alternative CPEC route.

Comparing Export Growths Growth trends are of immense importance as they reveal where the country is heading to in the long run, reveal what is happening in that particular sector, signals errors or if that sector needs to be taken care for, despite their absolute volumes.

Figure 1: Trends in Export growth of cotton. Source: Author’s depiction using UN ComTrade Data. GC = China’s export growth and GP = Pakistan’s export growth China’s cotton exports grow more than that of Pakistan and the gap between the two kept on increasing. Though after 2013, both countries are experiencing a decline in cotton export growth.

Figure 2: Trends in Export growth of rice. Source: Author’s depiction using UN ComTrade Data. GC = China’s export growth and GP = Pakistan’s export growth Pakistan is famous for its high quality rice exports and is a major exporter of it. The same is apparent from above growth trends. Pakistan’s export growth is much higher than China’s growth for all the years under consideration.

Figure 3: Trends in Export growth of Textile. Source: Author’s depiction using UN ComTrade Data. GC = China’s export growth and GP = Pakistan’s export growth. For the years under consideration China’s growth in exports remained higher than Pakistan and the gap between the two growths increased widely This may be quite alarming situation for Pakistan because the share of textile in total exports by Pakistan is much higher than that of China. Losing competitiveness over textile exports would worse off Pakistan significantly.

Figure 4: Trends in Export growth of leather. The export growth for leather products of Pakistan was slightly higher than China before 2008. Source: Author’s depiction using UN ComTrade Data. GC = China’s export growth and GP = Pakistan’s export growth. After that the growth declines for both countries. It is noteworthy that China recovers its leather export growth much sharply and persistently in comparison with Pakistan. In fact Pakistan is facing a decline in leather export growth.

Figure 5: Trends in Export growth of carpets and rugs. Source: Author’s depiction using UN ComTrade Data. GC = China’s export growth and GP = Pakistan’s export growth The export growths for woollen carpets & rugs of Pakistan and China, moves in the opposite direction. Pakistan is experiencing a continuous decline in its growth while China has a continuous and sharp rise in it.

Figure 6: Trends in Export growth of knitwear. Source: Author’s depiction using UN ComTrade Data. GC = China’s export growth and GP = Pakistan’s export growth Pakistan’s export growth in knit wear industry initially was relatively higher than China but afterwards due to relatively stagnant growth in Pakistan's Knit wear industry and persistently expanding growth in China’s Knit wear industry the gap between two growth widen sharply.

Figure 7: Trends in Export growth of sports. Pakistan’s sports goods are well recognized in the world but despite of this recognition sports goods industry in Pakistan is suffering from declines and fluctuations in its growth trend. Source: Author’s depiction using UN ComTrade Data. GC = China’s export growth and GP = Pakistan’s export growth On the contrary China’s export growth for sports goods was directed upwards except between 2008 to 2009

Figure 7: Trends in Export growth of foot wear. Source: Author’s depiction using UN ComTrade Data. GC = China’s export growth and GP = Pakistan’s export growth More or less the same trends were observed for the growth of foot wear industries' exports in China and Pakistan.

In a net shell, for all commodities except rice China’s export growth was not only higher but the gap between the two growths kept on widening with time. It is worth mentioning here that the share of these commodities in total country exports was relatively much higher for Pakistan than for China and if Pakistan has to encounter risk of losing these exports, it has to bear a significant damage in absence of any growth booster, protection or policy reforms in this regard.

Revealed Comparative Advantage The estimates of the Balassa Indices for measuring revealed comparative advantage of both China and Pakistan are presented and compared. The indices for the commodities majorly exported by Pakistan are categorised into two tables depending on the volatility or vulnerability of Pakistan’s comparative advantage in these commodities.

Table 1: Balassa Index for RCA in exports of commodities in which Pakistan is less vulnerable YEAR COTTON RICE TEXTILE   PAKISTAN CHINA 2003 40.498 2.991 59.191 1.247 34.753 3.138 2004 46.003 2.501 57.322 0.417 33.287 3.255 2005 51.772 2.616 77.667 0.305 36.537 3.573 2006 55.933 2.729 86.120 0.495 38.814 3.646 2007 56.414 2.574 72.083 36.906 3.534 2008 58.718 2.912 100.723 0.255 33.657 4.227 2009 58.545 3.083 71.726 0.288 30.644 4.518 2010 54.015 2.891 88.447 0.199 29.372 4.503 2011 56.497 2.744 66.560 0.171 27.903 4.662 2012 63.628 2.589 62.513 0.101 27.433 4.788 2013 61.898 2.869 67.078 0.140 28.653 4.699 2014 61.876 2.825 69.384 0.117 29.163 4.453 2015 59.932 3.024 77.482 0.095 29.573 4.228 Source: Author’s calculations using UN ComTrade Data. Pakistan had a comparative advantage in exports of primary commodities (cotton and rice) and textile over China. For primary commodities this supremacy of comparative advantage in exports showed an increasing trend while for that in textile was declining over time.

Table 1: Balassa Index for RCA in exports of commodities in which Pakistan is more vulnerable YEAR LEATHER CARPET KNIT WEAR SPORTS FOOT WEAR   PAKISTAN CHINA 2003 8.381 4.336 15.230 1.235 7.227 4.149 3.363 6.111 1.039 5.334 2004 9.128 3.780 16.623 1.210 9.431 4.176 3.323 5.795 1.181 5.128 2005 10.401 3.547 16.336 1.184 7.758 4.276 2.949 5.960 1.477 5.374 2006 10.486 3.241 14.257 1.161 8.359 5.213 3.123 6.022 1.286 5.139 2007 11.020 2.859 12.891 1.223 7.526 5.831 1.912 5.314 4.898 2008 11.465 3.110 10.715 1.461 7.540 5.448 1.789 5.528 1.120 5.228 2009 9.365 3.221 8.006 1.499 6.751 5.058 1.449 4.804 0.992 5.252 2010 8.948 3.329 6.514 1.539 7.123 1.766 5.065 0.672 5.550 2011 8.334 3.630 6.024 1.664 6.808 5.764 1.723 5.583 0.693 5.422 2012 8.341 3.532 6.143 1.739 6.492 6.493 1.777 5.756 0.642 5.934 2013 8.694 3.346 6.132 1.611 6.286 6.436 1.846 5.716 0.634 5.580 2014 8.726 3.024 5.772 1.579 7.157 5.563 2.145 5.675 0.706 5.302 2015 7.918 3.180 5.203 1.532 7.597 5.330 1.790 5.970 0.017 5.079 Source: Author’s calculations using UN ComTrade Data. Balassa indices for commodities in which Pakistan had a relative vulnerable situation are reported here. Over the years, Balasa indices for Pakistan were subject to fluctuations. Though Pakistan has a relative comparative advantage in these commodities over China but this is for now when CPEC route is not operational and China is using the old route for exporting its goods.

Once CPEC is operational, China’s cost of production would decline much sharply because of much cheaper imported inputs especially oil much lower cost to export on account of the expected distance, time and cost saved by using CPEC route in future. With increasing growth gap resulted from much sharper rise in exports growth of China in these commodities and a much lower expected cost of production in future, Pakistan would possibly be not in position to compete in exports of these commodities with China especially if the situation remained unconsidered by the government.

Benefits to China in terms of Time and Distance Between Kashgar (4376 km away from beijing) and the Persian Gulf Distance (Km) Time (Days) Using CPEC Route 2500 10 Using Current Route 13000 45 Savings (Benefits) 10500 35 Source: BMA Capital (2015) report. The route China is currently using for export is 13000 km long and takes 45 days. With CPEC this distance would be decreased to 2500 km and would only take 10 days.

Cost to export (per container) for China Further, China is experiencing a rising trend in its cost to export (per container). With CPEC becoming operational this cost would be down by 81% expectedly

Expected Decline in Cost to Export 2015 (per container) per Kilometre Description Unit Values Cost to Export (per container) US $ 830 Current Distance Km 13000 Current Cost to Export (per container) US $/Km 0.063846154 CPEC Route Distance 2500 CPEC Cost to Export (per container) 160 Expected Decline in cost to Export using CPEC Route 670 % 81 Currently China’s cost to export per container is US $ 830. With CPEC route this cost would be declined by US $ 670 i.e it would be down to US $ 160 per container. As a result exports would more likely to be raised.

Ending Note: Along with the enormous benefits of CPEC, a few threats are also attached with it which should be given due attention by the government so as to minimize these threats and maximize the gains. Stating all these treats does not calls for withdrawing from CPEC but these are identified so that the government should take necessary measures to minimize the damages expected by effective policy measures both for enhancing Pakistan’s competitiveness and protecting local industries.

Than You Thank You

Data and Data Sources For estimating and comparing commodity- wise export Balasa index of Pakistan and China for the years 2003-2015, the data used was mainly extracted from UN ComTrade Database. The data for cost to export / container was gathered from World Development Indicators and the distance in kilometres for China was taken from BMA Capital (2015) report.