The ‘E’ in CPEC

THE China-Pakistan Economic Corridor (CPEC), once completed, will become a major milestone in Pakistan’s economic history. The road networks that will extend from Gwadar to the Chinese border along with several power projects, and infrastructure development including export-processing and industrial zones, will benefit the economy.

The Chinese government’s intention is clear. It wants to connect the western region of China to one of the closest seaports, Gwadar, with an efficient transportation network that provides easier access to a major supplier of oil and other natural resources necessary to develop its western regions. This strategy is in accordance with the Western Development Programmes introduced in the late 1990s to focus on the industrial development of the western regions. Gwadar’s proximity to the oil-rich and resource-intensive Middle East will let Chinese importers circumvent the alternative sea routes that involve passage through several countries in the Indian Ocean and the extensive land transport from its seaports in eastern China. It is likely that several tons of natural resources and industrial supplies will flow through Pakistan.

A viable industrial development strategy is a prerequisite for economic growth. It is imperative that strategies are evolved that involve appropriate industrial policies as otherwise CPEC will just be a ‘transit’ route with no added benefits to Pakistan other than providing a shorter transport link to China and its trading partners.

Western China contributes to approximately 20pc of economic activity and 30pc of the population of China. As it is likely that CPEC will be a conduit primarily for Chinese imports from the Gulf countries (classified as Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) in the Middle East to western China, we need to analyse the current demand for Chinese imports from these countries.

We can classify imports into primary products and processed products according to UN Comtrade’s ‘broad economic categories’. Primary products are likely to have low levels of value addition and the manufacturing process has only made a minor contribution to the product’s value. For instance, crude oil is classified as a primary product and petroleum oil as a processed product.

In 2014, China imported some $88 billion worth of fuel and lubricant from the Gulf countries of which $76bn was unprocessed primary imports. This suggests that more than 85pc of the fuel and lubricants imported from the Gulf by China was processed after being transported to China.

On the other hand, Pakistan imported $13bn of fuel and lubricants of which $5.6bn were unprocessed primary products. Even if China is to import 5pc of its total imports of unprocessed primary products from the Gulf countries through CPEC, it will almost double the current flow of such products into Pakistan. Similarly, China imported approximately $17bn worth of industrial supplies from the Gulf countries, which is significantly greater than $2.4bn imported by Pakistan in 2014.

As a majority of the imports into China through CPEC are likely to be natural resour­ces and intermediary industrial supplies, a focus on the development of industries that rely on such products as their major inputs can be developed. For instance, the inflow of primary fuel and lubricant products can provide opportunities for petroleum refineries, parti­cularly in Balochistan. Although, there are only a handful of refineries in Pakistan, they are located either in or near Karachi or in Punjab. The inflow of industrial supplies into Pakistan, such as petrochemical intermediaries, may provide opportunities for plastic man­­­u­­facturers to establish businesses along the route.

The government can negotiate a deal with its Chinese counterparts that promotes value addi­­­­tion within Pakis­tan. For example, initially a small percentage of all primary fuel and lubricants imported into Gwadar by China could be converted into processed goods within Pakistan and then transported to China. This proportion can be increased over the years. Similar policies can be adopted for other industries, such as the petrochemical industries, for which China depends upon the imports of primary and processed products from the Gulf countries.

It is important to mention that the free-trade agreement between Pakistan and China in its current form is unlikely to promote exports from Pakistan into China. The trade balance is largely tilted towards China and this is likely to grow as the Pakistani transporters to China are likely to carry Chinese products on the return journey. In addition, the exports from Pakistan to China are currently heavily concentrated in cotton yarn, which contributes to about 70pc of the exports from Pakistan to China.

A strong industrial policy to complement CPEC is essential, one that promotes the deve­lop­­ment of strategic industries at specific locations within Pakistan. Without appropriate industrial policies, CPEC may fail to achieve positive outcomes for the Pakistani economy.

Published in Dawn, March 20th, 2016