Sajid Kazmi
sajid@sdpi.org
The failure of the WTO negotiations has given rise to Free Trade Agreements (FTAs) across the globe. Countries are signing Bilateral Trade Agreements, a variant of FTAs. FTAs aim to remove the barriers to trade and investment. They create a freer flow of goods, services, investment and people. Within our FTAs, Pakistani businesses will find it easier to trade with FTA partners and to invest in their markets. FTAs also present business opportunities for Small and Medium Enterprises (SMEs) to enhance their market access.
A Free Trade Agreement is a legally-binding agreement between two or more countries to liberalize trade, facilitate the flow of trade and investment, and bring about closer economic integration. FTAs allow the partners to give each other preferential market access.
Multilateralism and regionalism have brought radical trade liberalization across the world during 1990s. Multilateralism surged forward with the successful conclusion of the Uruguay Round of trade negotiations, which ended with the establishment of World Trade Organization (WTO) in 1995. Multilateral Trade Regime is always a preferred option over bilateralism as bilateral agreements have inherent weaknesses, including asymmetric power relations, especially when these are negotiated between North and South.
After the creation of the WTO, several new issues relating to intellectual property rights and social issues, such as Trade Related Intellectual Property Rights (TRIPS), labour standards and the environment, also became part of “trade issues” for multilateral negotiations. In the Singapore Ministerial Meeting, four new initiatives - investment; competitive policy; transparency in Government procurement; and trade facilitation - commonly known as the Singapore issues, also became the subject of negotiations under the WTO. These issues, however, were kept out of the “single undertaking”. Working Groups were established to further deliberate on these initiatives: these deliberations are on-going.
Together, these factors contributed to uneasiness for the developing countries, which tended to the view that the implications for their growth of trade, commerce and economic activity would be negative. At the same time, the industrialized countries had taken recourse to regionalism (for example the European Union and NAFTA) and bi-lateralism in a bid to keep their markets intact. At present, more than 60% of the global trade is channeled through bilateral and regional trading arrangements. In this process, developing economies are marginalized.
The Cancun Round of WTO negotiations in 2003 ended in disarray, prompting countries to seek other means of market access and trade liberalization. With the WTO-initiated multilateral liberalization of trade facing significant delays for various reasons, including disagreement over agriculture policies, countries are opting to forge regional or bilateral FTAs to accelerate improved access to international markets. It is estimated that roughly 300 such arrangements presently exist.
Against this backdrop it is essential for Pakistan to align itself with other developing economies by establishing bilateral and regional trading arrangements to both maintain its international trade at the present level and to give it a boost so it attains its due market share by securing a higher percentage of the total global trade. Pakistan is pursuing a policy of export-led growth, for which the issues of market access are important.
As a consequence, a carefully designed and orchestrated trade diplomacy initiative has been launched. Recent high-level visits by the President and the Prime Minister were primarily aimed at strengthening trade relations with countries in South and East Asia, Asia Pacific and South America. This does not entail ignoring our present major trading partners, America and the European Union. Market access initiatives in these countries are also being pursued with renewed vigour from the perspective of Pakistan's role in the fight against terrorism. However, the high level of political relations needs to be translated into deeper, more permanent and beneficial economic and commercial relations.
Pakistan's objectives in negotiating bilateral and regional preferential/free trade agreements are primarily the following:
The present FTAs are not confined solely to liberalization and market-opening measures. They are comprehensive and include investment, trade facilitation, intellectual property rights, economic cooperation in information and communications, science & technology, education and training, research & development, financial cooperation and SME development. Accordingly, the initiatives in all the newly-instituted FTAs are not restricted to goods: services and investments are also included. With Sri Lanka, for instance, a bilateral FTA on goods is being operationalized, which will broaden the FTA to cover services and investment. This will transform the FTA into a comprehensive economic partnership.
Pakistan is successfully pursuing the policy of securing market access and economic linkages with China and a number of other countries in East Asia. The initiative with China has been of great significant. Pakistan negotiated an Early Harvest Programme, which was operationalized on January 1, 2006. This has enabled Pakistan to secure market access on all items of our present day export interests. These will reduce tariffs to zero in China at the latest by January 1, 2008. Major tariff reduction, however, will be witnessed as early as January 1, 2006, providing unprecedented market access of our exports in China's expanding market. That market has a population more than the combined population of the EU and America.
Items in the access agreement include bed-linens, table linens, other home textiles, towels, cotton & blended fabrics, marble articles, surgical goods, sporting goods and cutlery. In return Pakistan has given tariff-reduced or free access only on certain organic chemicals and machinery: these tariffs will be eliminated on most of the items in two years.
Both trading partners will also simultaneously eliminate tariffs on certain fruits and vegetables. The ambit of the existing Preferential Trade Agreement (PTA) has also been considerably enlarged and made a part of the Early Harvest Programme. This will create a linkage with China for our industries to source their machinery from with zero duty and will help to boost industrial activity in Pakistan. This will generate employment, SME development and small businesses, thereby alleviating some of the poverty in Pakistan. A comprehensive FTA with China will be put in place within a year.
In accordance with Pakistan's policy of establishing close linkages with East Asian countries, our trade diplomacy efforts are now focused on ASEAN countries. It is worth mentioning that our trade with Asian countries, other than Middle East, in the year 2003-4, was US$ 8 billion. Exports were $2.8 billion and imports accounted for US$ 5.2 billion. A major portion of this trade volume was with Japan and China. Trade with other East Asian countries was only around $2 billion. The trade balance with Asia is heavily tilted against us.
ASEAN is an alliance of 10 countries, which includes four 'Asian Tigers' - Malaysia, Indonesia, Thailand and Singapore. The ASEAN Free Trade Agreement (AFTA) is the most successful FTA in Asia. Intra-Asian trade expanded from US$ 82.4 billion in 1993 to US$ 174.2 billion in 2003. In 1993, intra-ASEAN trade was 19% of ASEAN global trade: this had increased to 22% in 2003. The ASEAN leaders agreed in October 2003, in their Summit at Bali, Indonesia, to establish the ASEAN Economic Community (AEC) by 2020. AEC is envisaged as a single market and production base with a free flow of goods, services, investment, skilled labour and capital.
To realize AEC, ASEAN leaders agreed during the 10th ASEAN Summit in November 2004 to accelerate tariff elimination and facilitate trade and investment in 11 priority sectors. These include electronics, “e-ASEAN”, healthcare, wood-based products, automotives, rubber-based products, textiles and apparels, agro-based products, fisheries, air travel and tourism. The timeline for the implementation of these measures ranges from 2005-2010. Apart from tariff elimination, the roadmaps have also been developed and focused on investment facilitation measures.
It is amply evident that Pakistan cannot afford to waste any time in pursuing the objective of an FTA with ASEAN as a Region. To achieve this objective the President and the Prime made the visits referred to earlier. In all these countries Pakistan was able to develop consensus that it should get a Full Dialogue Partnership with ASEAN followed by Summit-level participation. This will lead us to initiate negotiations with ASEAN as a Region. In the meanwhile, negotiations have already begun with Malaysia, Indonesia, Singapore and Laos for bilateral FTAs. The negotiations with Malaysia are at an advanced stage and an Agreement on the Early Harvest programme was signed and, as noted above, became operational on January 1, 2006. These negotiations will be vigorously pursued for early conclusion and operationalization.
Pakistan has deep cultural, political and religious linkages with the Middle East. Our major imports of crude and petroleum products are sourced from these countries. Our total trade with the Middle East in 2003-04 was US$ 5.3 billion, representing exports of only US$ 1.6 billion. Pakistan has initiated negotiations with the Gulf Coordination Council (GCC) for a bilateral FTA. The GCC and the EU are negotiating an FTA, which will be the first initiative of its kind in the world. Having an FTA with GCC, therefore, would indirectly link us to the European Union in due course.
Pakistan is an important country in South Asia and, after India, the biggest SAARC economy. The South Asian Free Trade Agreement (SAFTA) was signed in Islamabad in January 2004 and was ratified by all SAARC countries with effect from January 1, 2006.
Simultaneously, Pakistan has already concluded an FTA with Sri Lanka, which was put into effect in 2005. Negotiations are underway with Nepal and Bangladesh for similar arrangements. The bilateral FTAs with various SAARC countries will help in creating a viable regional arrangement for SAFTA.
The Ministry of Commerce is holding a composite dialogue with India and has also established a Study Group to address tariff and non-tariff barriers, so as to establish a level playing field for bilateral trade. The leaderships of both countries are cognizant of the burning political issues, which have a direct bearing on our economic and commercial relations. There is a resolve to address all of these issues for early resolution, for sustainable growth in bilateral as well as regional trade within SAARC.
Pakistan, because of its geographical location, is a gateway to Central Asia. Afghanistan is now our second largest trading partner in the world after the USA. Pakistan is also pursuing a Regional FTA with Iran, Afghanistan, Turkey and six Central Asian States under an Economic Cooperation Organization Trade Agreement (ECOTA). We have already concluded a Preferential Trade Agreement (PTA) with Iran, which became operational in September 2006.
Pakistan is an active member of the Organization of Islamic Conferences (OIC) and under its umbrella an ambitious Trade Preferential System (TPS) is being negotiated. The D-8 initiative is also being pursued simultaneously. These are the members of OIC with countries on three continents, which have great potential to form a significant market access initiative. The Preferential Trade Agreement amongst the D-8 countries was signed during the D-8 Summit at Bali.
As mentioned earlier, Pakistan has also launched market-access initiatives with the US and the EU. Planning is underway to initiate negotiations with some African countries and the countries of South America including Argentina, Brazil, Uruguay and Paraguay. These South American countries are member of MERCOSUR.
As far as FTA with Sri Lanka is concerned, the business communities in both countries will benefit immensely from this pact. The duty rebates alone will lift a heavy burden from their shoulders. Sri Lanka will immediately grant duty-free access to 102 tariff lines. Pakistan will reciprocate, granting Sri Lanka duty-free access to 206 tariff lines. Sri Lanka will eliminate customs duty on 4,527 (out of a total of 5,255) tariff lines at the six-digit level, covering around 87% of tariff lines over the next five years. Pakistani oranges, chickpeas, cumin seeds, fennel seed, motorcycles and accessories will enjoy duty-free benefits in the Sri Lankan market. These concessions will benefit not only the business communities but also the consumer in both countries.
However, there is as yet no breakthrough in signing an FTA with the United States, which has linked the FTA with the signing of the Bilateral Investment Treaty (BIT) and is unprepared to accommodate Pakistan's reservations over the issue. A clause introduced into the final text by the US government discussed a “pre-establishment phase of investment” which Pakistan wanted to be excluded. According to the proposed clause, if any problem arises for the US investor, even when he is in the process of establishing a business in Pakistan, he should be compensated through a court of law. Pakistan argued that when the business had not been set up, a US investor should not be allowed to seek compensation and wants what it considers to be an unjust provision deleted from the final text.
The American government is applying NAFTA standards to sign BIT with Pakistan and this is very unfavorable to Pakistan. The examples of Canada and Mexico are cases in point: both were suffering from signing their BITs with the United States because of a number of harsh clauses.
These harsh clauses have now been included in the proposed BIT text that Pakistan will be expected to sign. Due to these clauses the US has won all the cases against Canada and Mexico and as a result both countries are facing huge financial losses. The US generally determines the BIT with any country in such a manner that, in case of arbitration, the interests of the US investors are always well protected.
Free market economists are inclined, as a matter of principle, to advise against bilateral or Regional Free Trade Agreements. There is an apprehension that interest in negotiating regional and bilateral FTAs and customs unions threatens the authority and effectiveness of the multilateral trading system. The ways in which the European Community protects its agricultural markets clearly illustrates the case.
As mentioned earlier, due to inherent weaknesses of bilateral arrangements, these are not a priority solution as there are a lot of chances of creating strongly-imbalanced outcomes during negotiations due to the unequal clout of the partners. Moreover, it involves a lot of cost in terms of human resource commitment to negotiate bilateral agreements and the preferred arrangement is the multilateral trade regime, where countries can economize on 'negotiating fatigue' by pooling resources.
