Feasibility Study on A China-Pakistan Free Trade

Agreement

(Chinese)

March 15,2005
Chapter I Basic status of China’s economy and the regional trade
arrangements

I. Macro-economy of China
China has been maintaining a high-speed economic growth for over two decades since its reform
and opening-up, with an average annual GDP growth rate of more than 8.0%. By the end of
2004, China’s GDP grew 9.1% year on year to reach RMB13, 651.5 billion Yuan. The adoption
of reform and opening-up policy has turned a new page in China’s history as it has elevated
China from a low-income, less-developed country into a middle-income developing economy
and China’s per capita GDP has surpassed US$1,000. The dynamic changes of key indexes for
China’s macro-economy are presented in Table 1-1. By the end of 2004, China has a total
employment of 754.12 million people, 9.8 million more than last year. The registered urban
unemployment rate dropped 0.1% year-on-year to 4.2%. China’s CPI rose 3.9% compared with
last year. China has maintained a good balance of payment in 2004 with a trade surplus. By the
end of 2004, China’s foreign exchange reserve has hit US$609.90 billion, up US$206.70 billion
from last year(table 1-2). The exchange rate of RMB has been kept basically stable. At the end of
2004, 8.276 RMB are equivalent to 1 USD, and China’s foreign exchange reserve has been
increased continuously (table1-2).

Fiscal and Monetary Policies. China has adopted active fiscal policy and stable monetary policy
to counter deflationary pressure since 1998. These two policies concertedly maintained
investment, consumption and export on the fast-growing track, culminating to an annual GDP
growth of around 8.0%. To guard against inflation, since the second half of 2004, China has
switched to implement stable fiscal policy and monetary policy (refers to neutral fiscal and
monetary policy, that has neither expanded impact, nor restrained impact)

Table1-1 Macro Economy Items of China 1998－2004

Year Growth of Growth Registered Growth Rate Gowth Gowth
GDP(billio Rate of Unemployme of Rate of Rate of
n RMB, ％) CPI(％) nt Rate in Investment Money Bank
Urban in Fixed supply for Loan(％)
Areas（％） Assets（％） M2（％）
1998 7834.52,7 -0.8 3.1 13.9 14.8 15.5
.8
1999 8206.75,7 -1.4 3.1 5.1 14.7 8.3
.1
2000 8946.81,8 0.8 3.1 10.3 12.3 6.0
.0
2001 9731.48,7 0.7 3.6 13.1 17.6 13.0
.5
2002 10479.1,8 -0.8 4 16.1 16.8 16.9
.0
2003 11669.4,9 1.2 4.3（7*） 27.6 19.6 29.3
.1
2004 13651.5,9 3.9 4.2 25.8 14.6 14.4
.5

Table1-2 Macro Economy Items of China 1998－2004

Year Industry Total Volume FDI Foreign Revenue
Growth (billion of I/E (billion (billion USD) Reserve（billion (billion
RMB,％) USD) USD） RMB)
199 3354..1,8.9 323.95 45.463 144.96 926.28＊
 8

199 3535.7,8.5 360.63 40.319 154.675 1031.50

9
200 3957.0,9.9 474.29 40.715 165.574 1266.58
0
200 4260.7,8.9 509.65 46.878 212.165 1516.55.
1
200 4593.5,10.2 620.77 52.743 286.407 1699.66
2
200 5361.2,12.6 851.21 53.505 403.251 2046.61
3
200 6281.5,11.5 1154.79,35.7 60.630,13.3 609.932,51.2 2571.80,25.7
4
(%)

II. Foreign Trade

China registered a total volume of US$1154.79 billion of commodity trade in 2004, up 35.7% year-on-year,
and China is now the world's third largest economy in terms of trade volume and a trading pattern has
preliminary shaped up which is characterized by active participation of economic globalization and large-scale
import and export volume. The exports and imports hit US$593.4 billion and US$561.4 billion, up 35.4% and
36.0% respectively, with a trade surplus of 32 billion, 6.5 billion more than last year (table 1-3). Same as 2003,
the foreign trade growth rate has sustaining highest speed since 1980, and the trade volume with major trade
partners have been increased rapidly. Foreign trade has grown to be one of the driving forces for China’s
economic growth.

Table 1-3
China’s Import and Export 1998-2004: Total Value and Change (USD
100 Million)
Year Total Value of Per Change Over Expor Per Change Impor Per Change
Import and Previous Year% t Over Previous t Over
Export Year% Previous
Year%
1998 3239.5 -0.4 1837.1 0.5 1402.4 -1.5
1999 3606.5 11.3 1949.3 6.1 1657.0 18.2
2000 4743.0 31.5 2492.0 27.8 2250.9 35.8
2001 5096.5 7.5 2661.0 6.8 2435.5 8.2
2002 6207.7 21.8 3255.7 22.3 2952.0 21.2
2003 8512.1 37.1 4383.7 34.6 4128.4 39.9
2004 11547.9 35.7 5933.7 35.4 5614.2 36.0
Data From The Customs General Administration People’ s Republic of China
 Table 1-4 Value of Import and Export of China 2004 By SITC (USD 100 Million)
Category（SITC） Export Import
1. Value Per Change Value Per Change Over
Over Previous Previous Year%
Year%
Total Value 4384 34.6 4128 39.9
Primary Goods 348 22.0 728 47.7
Food and Live Animals 175 19.9 60 13.8
Chiefly for food
Beverage and Tobacco 10 3.6 5 26.8
Crude (Raw?) Materials, 50 14.3 341 50.1
Inedible ,Except Fuels
Mineral Fuels, Lubricants 111 31.7 292 51.5
and Related Materials
Animal and Vegetable Oils, 1 18.0 30 84.7
Fats and Waxes
Manufactured Goods 4036 35.9 3401 38.3
Chemicals and Related 196 27.8 490 25.5
Products
Manufactured Goods 690 30.4 639 31.8
Classified by Material
Machinery and 1879 48.0 1929 40.8
Transportation Equipment
Other Manufactured 1261 24.7 330 66.7
Articles
Products Not Classified 10 47.4 13 -18.0
Elsewhere
Structure of trade in goods
According to the statistics of SITC, finished industrial products composed the majority of im/export in 2003. It
took 92.1% of total exportation and still mounting up, while 82.4% of total importation lower than the figure in
last year (Table 1-4).

Amounting to 54.5% and 28.9% of the total import respectively, the importation of machinery and electronics
in 2003 was 224.99 billion USD, and that of high tech products was 119.301 billion USD. The increase both
exceeded 44%. Soybean and auto parts ranked the tops of the fast growing imported products with the increase
of 118.2% and 109.1%. The importation of steel and crude oil were 19.916 and 19.809 billion USD with the
increase of 61.1% and 55.3%. The exportation of machinery and electronics in 2003 was 227.46 billion USD
and that of high tech products 110.32 billion USD, amounting to 56.4% and 27.3% of total exportation with the
increase of 44.8% and 62.6% respectively. The exportation of auto data processing equipments and their parts
reached to 41.11billion USD with the increase of 104.2%.

2. Main Import Regions and Export Markets

Please refer to the diagram 1-1 for the top 10 trading partners of China and their particulars in 2003.
Comparing with the situation in 2002，the proportion taken by Japan and the States have declined by 0.7%
and 0.9%, while the proportion by EU and ASEAN increased by 0.7% and 0.4%.
 Diagram 1-1 Trade Proportion to China Ahead of Ten
,2003
ASEAN9.20%
Korea7.40% Japan
HK10.30% U.S.A
TaiWan6.90% EU
H.K
EU14.70% Russia1.90% ASEAN
11.60%
Australia1.60% Korea
TaiWan
Canada1.20% Russia
U.S.A14.80% Japan15.70% Australia
Canada

Data From The Customs General Administration , PRC.

Please refer to diagram 1-2 for top ten import regions and their respective market shares. Comparing with the
proportion in 2002, the import from Japan, EU and the States declined by 0.1%, 0.2% and 1.0%, while that
from ASEAN and Korea boosted up by 0.9% and 0.7%.

Diagram 1-2 Import Origin to China Ahead of ten, 2003

Korea10.40%

ASEAN11.50%
U.S.A8.20%
Japan
HK2.70%
EU
TaiWan
Russia2.40%
ASEAN
Korea
T aiWan 12.00% 8.30% Australia1.80%
U.S.A
HK
Brazil1.40% Russia
Australia
EU12.90% Japan 18.00% Brazil

Data From The Customs General Administration, PRC.

Please refer to diagram 1-3 for top ten export markets and the respective market shares.
Comparing with 2002, the exportation to Japan and the States dropped down by 1.3% and
0.4%，while a boost of 1.7% to EU.
 Diagram 1-3 Export Destination of China Ahead of
Ten,2003
Japan13.60%
ASEAN 7.10%
U.S.A
Korea4.60% TaiWan2.10% HK
EU
EU16.50%
Australia1.40% Japan
ASEAN
6.20% Russia1.40% Korea
TaiWn
HK17.40% Canada1.30% Australia
U.S.A21.10% Russia
Canada

Data From The Customs General Administration P.R.C.

3. Trade in Services
In 2003, the trading amount of Chinese service reached to 102 billion USD, the first time it jumped over 100
billion USD. China ranked No.9 in the world service exportation and the amount is larger any other developing
countries. Taking 2.7% of the world service export, China has exported the service of 46.7 billion USD with
the increase of 18.0%. Taking 3.2% of the world service import, China has imported the service of 55.3 0
billion USD with the increase of 19.0%. China ranks No.8 in the sector of service importation and No.1 among
developing countries. (Diagram 1-4 and Table 1-5)

Investment and Savings. In 2003 China’s total investments on fixed assets jumped 26.7% year-on-year to
RMB5, 511.80 billion Yuan. Investment in industrial sector grew significantly faster than that in other sectors.
41,081 foreign invested enterprises have been granted approval of establishment, up 20.2% from last year.
Actually utilized foreign investment rose 1.4% to US$53.50 billion. China recorded a total balance equivalent
to RMB22, 036.40 billion Yuan of local and foreign currency deposits in financial institutions, up 20.2% year-
on-year; of which business deposits rose 19.4% to RMB7,678.50 billion Yuan, and urban and rural resident
deposits rose 17.4% to RMB11,069.50 billion Yuan.

Diagram 1-4 Development of Servics,China 1982-2003

Unit:USD 100 Million Source : The State
Balance Export Import Administration of
Foreign Exchange,
600 PRC.

400 Regarding to the

components in the
200 sector, tourism and
transportation took
31.9% and 25.6% of
0 the overall volume in
1 2 3 4 5 6 7 8 2003. These two lines
-200 together took the
majority of service
Year 1982 1985 1988 1991 1994 1997 2000 2003
trading. The
transportation,
insurance and intellectual patents were suffering from deficit and tourism enjoyed surplus in the year of 2003.
The overall status of service trading was deficit.（Table 1-6）。
 Table 1-5 The Ranking of Main Services Import and Export Countries or Regions, 2003 (USD
Billion)
Rankin Country Expor Proportio Per Rankin Country Expor Proportio Per
g or Region t n Change g or Region t n Change
% Over % Over
Previou Previou
s Year s Year%
%
1 U.S.A. 282.5 16 4 1 U.S.A. 218.2 12.5 6
2 England 129.5 7.3 5 2 Germany 167.0 9.6 12
3 Germany 111.7 6.3 12 3 England 112.4 6.4 11
4 France 98.0 5.6 14 4 Japan 109.7 6.3 3
5 Spain 76.4 4.3 23 5 France 81.6 4.7 20
6 Italy 72.8 4.1 23 6 Italy 74.1 4.3 21
7 Japan 70.2 4.0 8 7 Netherla 66.2 3.8 17
nd
8 Netherla 64.1 3.6 18 8 China 55.3 3.2 19
nd
9 China 46.7 2.7 18 9 Ireland 48.5 2.8 20
10 Hong 43.2 0 10 Canada 47.8 2.7 14
2.5
Kong
Global Sum 1763 100 12 Global Sum 1743 100 12
Data From World Trade Organization (WTO)

III. China’s overseas investment and the utilization of foreign investment.

By the end of 2004, China has approved 508,941 foreign investment enterprises, contracted FDI value reached
1096.63 billion USD, actual utilization of FDI 562.07 billion USD and accumulative utilization of foreign
investment stock about 210 billion USD. The increased industrial value of foreign enterprises took 28%
percent in that of the whole country; the taxation of foreign investment enterprises accounted for 20% of the
national industrial and commercial revenue. The high-tech and service sectors have become the main invested
areas .About 30 multi-national enterprises have established regional headquarters, foreign research and
development institutions surpassed 400, the total employees of the foreign investment enterprises reached 23.5
million. In 2004, 43,664 foreign investment enterprises have been approved to be established in China,
increased 6.3% compare with last year; contracted FDI 153.5 billion USD, with the increase of 33.4%; actual
utilization of FDI historically surpassed 60 billion USD and reached 60.6 billion, with the increase of 13.3%.
The FDI sector structure and the major investment sources are as following tables.

Table 1-7 The FDI sector structure in China till 2002 Unit: US$ 100
million
Sector Name Project Proportion Contract Foreign Proportio
Numbers Investment n
Total 424196 100% 8280.59 100%
Agriculture, Forestry, Herd, Fishery 12217 2.88% 157.59 1.90%
Industry 310279 73.15% 5242.86 63.32%
Architectural sector 9644 2.27% 225.72 2.73%
Transportation, storage and 4729 1.11% 187.99 2.27%
Telecommunication
Wholesale and retail trade, restaurant 21358 5.03% 264.57 3.20%
sector
Real estate, public service sector 45490 10.72% 1810.81 21.87%
Health, Sport and Social Welfare 1119 0.26% 51.64 0.62%
Education, Culture and Art, Broadcast, 1412 0.33% 23.04 0.28%
TV and film
Science and Integration Technical 2933 0.69% 33.12 0.40%
Service sector
Other Sector 15015 3.54% 283.25 3.42%
Resource: China Investment Guide Website
 Table 1-8: Top 15 countries / regions who invested in China till the year of 2002 Unit: US$
10,000
Actual
Country/Regi Percentag Contract Percentage Percentage
Project used FI
on e% FI Amount % %
Amount
42419 4479659
Total 100 82805981 100 100
6 7
21087 2048752
Hong Kong 49.71 37380600 45.14 45.73
6 3
US 37280 8.79 7628190 9.21 3988943 8.9
Japan 25147 5.93 4953212 5.98 3633986 8.9
Taiwan
55691 13.13 6147086 7.42 3311028 7.39
Province
Virgin Island 6659 1.57 4934803 5.96 2438765 5.44
Singapore 10727 2.53 4014955 4.85 2147270 4.79
South Korea 22208 5.24 2747593 3.32 1069550 2.39
U. K 3418 0.81 1963261 2.37 1069550 2.39
Germany 3052 0.72 1432209 1.73 799367 1.78
France 2033 0.48 719215 0.87 554335 1.24
Macau 7827 1.85 1079181 1.3 477322 1.07
Netherlands 1065 0.25 897448 1.08 433815 0.97
Cayman
706 0.17 948071 1.14 380333 0.85
Islands
Canada 6040 1.42 1037740 1.25 335789 0.75
Malaysia 2538 0.60 620053 0.75 283544 0.63
Others 28928 6.82 6302364 7.61 2935131 6.55
Resource: China investment Guide website

Basically, during the last more than 20 years, FDI China’s FDI inflow has been getting bigger and bigger, but
with a comparatively low outflow, characterized as a net FDI inflow country. Till 2003, 3439 Chinese
enterprises have a total overseas investment of 33.4 billion USD and an accumulative net overseas investment
of 33.2 billion USD after deducting returned investment of these enterprises. China’s overseas investment of
2003 accounted at 2.85 billion USD, 5.5% up year on year. On the basis of UNCTAD statistics, China ’s
overseas investment accounted for 0.45% and 0.48% of the global total volume.

China’s overseas investment is mainly flowing to Asian countries and regions. China has investment in more
than 80% Asian countries and regions, and has the features of wide invested areas and outstanding focuses.
China have invested in 139 countries and regions, mainly in Hang Kang, US, Japan, Germany, investment in
these areas took 41% of China’s total overseas investment. More than 70% percent of China’s overseas
investment flowed to the sectors of mining, wholesale, service and construction.

IV.Regional Trade Arrangement and the Patterns of Negotiation and Models of

Reduction.
Till now, more than 20 countries have proposed to sign up free trade agreements with China, among which the
followings are making significant progress.

(1) China-ASEAN Free Trade Area. China and ASEAN have signed up Framework Agreement of Economic
Cooperation Between China and ASEAN on November 4,2002. According to the agreement, two parties
will implement tax reduction since 2005. Starting from the sectors of agriculture, telecom, human resource
and development in Mekong area, the cooperation will head to other sectors gradually. The free trade area
between China and six primary ASEAN member countries (Brunei, Indonesia, Philippine, Singapore,
Thailand and Malaysia) will be set up in 2010. Other four members (Vietnam, Laos, Cambodia and
Burma) will enjoy 5years’ interim and eventually, the free trade area will be set up in 2015. Most of
products in China and ASEAN will enjoy nil duty and non-tariff measures will be stopped. The negotiation
on commodity trade started from the beginning of 2003 and will complete no later than June 30, 2004. The
negotiation on service and investment has started in 2003. Early Harvest Program has been initiated on Jan
 1, 2004.

(2) Closer Economic Partnership Arrangement (CEPA) between Hong Kong SAR and Chinese Mainland was
signed on June 29, 2003 between central government and Hong Kong SAR government and carried into
execution on Jan 1, 2004. Expanded CEPA Agreement was signed in October 17th 2003.

Closer Economic Partnership Arrangement (CEPA) between Macao SAR and Chinese Mainland was signed
on Oct. 17, 2003 between central government and Macao SAR government and carried into execution on the
same day as CEPA with Hong Kong. The above-mentioned arrangements mainly consist of achieving the
free trade of commodity and services as well as investment convenience among mainland, Hong Kong and
Macao. The commitments to Hong Kong and Macao are as followings:commencing on Jan 1, 2004, nil duty
is imposed to 273 tax items originally produced in Hong Kong and Macao. Simultaneously, the non-tariff
measures and custom quota have been called off. 18 service-sectors are permitted to invade into mainland
market at different degree.

(3) Bangkok Agreement, a favorable arrangement supported by UNESCAP among the developing countries in
accordance with authorization articles. China joined the Agreement on May of 2001. This is the first
substantial favorable arrangement that China entered. Since Jan 1, 2002, the favorable tax and temporary
rules on place of origin have been implemented to the members of Korea, Sri Lanka, Bengal, Laos and
India. For other members, the tax imposed on 902 products of 8 items has been deducted. China enjoys tax
allowance on 188 products of 6 tax items from India, 214 products of 6 tax items from Korea, 288 products
of 8 tax items from Sri Lanka, 129 products of 8 tax items from Bengal. Additionally, China offers extra
allowance on 20 products of 8 tax items to Bengal and Laos, two less developed counties.

(4) Preferential tax arrangements between China and Pakistan. The two countries have signed bilateral PTA on
December 3, 2003. The tariff allowance stipulated in Bangkok Agreement is applied on products of 893
tax items exported from Pakistan. The allowance difference is 18.5%. Pakistan offers the same allowance
to China as that offered by India in Bangkok Agreement, the allowance difference amounts to 27.7%.The
agreement has been applied in January 1st, 2004.

(5) China-SACCU FTA negotiation. In June 28, 2004, the launching of the negotiation was declared by Mr.
Bo Xilai, China’s minister for Commerce and the SACCU representative during The Vice-Chairman Zeng
Qinghong’s visit to South Africa. At the meantime, South Africa announce to admit the full market status
of China. The two sides will start the first round negotiation in 2005 and conclude it within two years.

(6) China-GCC FTA negotiation. In July 6, 2004, Minister Bo Xilai and the visiting GCC representatives
signed an Agreement and announced to launch China-GCC FTA negotiation. The negotiation is planned to
be concluded in 2005.

(7) China- Chile FTA negotiation. In January, 2004, the two governments began to organize the joint feasibility
study and completed it in September. The Conclusion is that the establishment of bilateral FTA will have
positive impacts on both countries. In November, 2004, during the visit of H.E. Hu Jintao, President of
China, the negotiation on bilateral FTA was launched.

8. China-New Zealand FTA Negotiations. New Zealand is one of the countries that first acknowledged China’s
market economic status. On November 19, 2004 when the APEC meeting was held, Chinese President and
New Zealand Prime Minister jointly declared the launching of China-New Zealand FTA Negotiations. On
December 6, 2004, the negotiations were formally started in Beijing.
 Chapter II Bilateral Trade and Investment
China and Pakistan have maintained a long-term stable friendship, which ensures a sustained trade and
economic ties. Pakistan had been China’s largest trading partner in South Asia, but later it became China’s
second largest trading partner in this area because of the sharp increase of China-India bilateral trade.
However, China and Pakistan are complementary in terms of commodity structure and market demand. In
recent years, bilateral trade and mutual investment between China and Pakistan have maintained a rapid
growth rate.

I Trade in Goods

1. General Situation
At present, bilateral trade volume between China-Pakistan accounts for only a small percentage of China’s
total foreign trade. According to General Administration of Customs of P.R.C, in 2003, the bilateral trade
volume between China-Pakistan was 2.43 billion USD, less than 0.3% of China’s total foreign trade that year;
and China’s export to Pakistan accounted only 0.42% of China’s total export. However, China and Pakistan
have witnessed rapid increase in bilateral trade. In 2004, the bilateral trade volume between China-Pakistan
reached 3.061 billion USD, hitting he historic high, among which China’s export and import valued 2.466
billion USD and 595 million USD, an increase of 26%, 33% and 3% respectively.

Table 2－1 Bilateral trade between China and Pakistan (2002-2004)

Import and Export

2002 2003 2004
(10 million USD)
24.3 （ 35%↑ 30.61 （ 26%↑
Total volume 18（29%↑）
） ）
12.4 （ 52%↑ 18.5 （ 49%↑ 24.66 （ 33%↑
China’s export
） ） ）
China’s import 5.6（4%↓） 5.8（3%↑） 5.95（3%↑）
12.7 （ 87%↑ 18.71 （ 47%↑
China’s surplus 6.8
） ）

Currently, the bilateral trade between China and Pakistan is unbalanced. China has been enjoying trade surplus,
which was increasing year by year. As shown in Fiugre2-1, China’s surplus from 2002 to 2004 were 680
million, 1.28 billion and 1.87 billion USD respectively.

With the rapid growth of bilateral trade between China and Pakistan in recent years, the Chinese government
has attached great importance to the problem of unbalanced trade and adopted measures to expand import from
Pakistan. In 2001 and 2002, a Chinese team went to Pakistan to purchase chromium ores and cotton yarn,
which valued 18 million USD and 2.65 million USD respectively. China still plans to purchase in Pakistan in
2005.
2. Commodity Structure
China and Pakistan are highly complementary in product structure with a small amount of products competing
to each other. China mainly imports agriculture products and articles thereof, especially textiles and textile
articles with cotton yarn as the main product. As shown in Table 2-2, the main imports include: cotton yarn and
woven fabric of cotton, Terephthalic acid, leather of bovine or equine animals, crude oil, and chromium ores.
In 2003, china’s import from Pakistan valued 580 million USD, among which cotton yarn and woven fabric of
cotton valued 450 million USD accounting for near 80% of the total. In general, Pakistan’s export to China is
not diversified.

Table 2-2 Top 10 commodities imported from Pakistan to China in 2003

China’s tariff
Share of
rate(%)
China’s
Value(USD Value
No. Name total import
10,000) growth（％）
from
Pakistan

5-6
1 Cotton yarn 34479.9 1.2％ 59.45%

woven fabric of 10-14

2 10517.3 -14.1％ 18.13%
cotton
10
3 Terephthalic acid 3736.7 13.9％ 6.44%

Leather of bovine 5-14

4 1543.7 71.3％ 2.66%
or equine animals

5 Crude oil 947.5 70.0％ 1.63% 0

Chromium ores and 0

6 925.8 139.5％ 1.60%
concentrates
Synthetic filament 5
7 809.7 2.2％ 1.40%
yarn
8 Frozen fish 797.5 89.1％ 1.38% 10-12
Plastics in primary 6.5-10.7
9 338.2 11.7％ 0.58%
forms
1(quota)
10 cotton 149.4 785.5％ 0.26%

At present, China is Pakistan’s fourth largest import country, next to Saudi Arabia, the US and the United Arab
Emirates. Pakistan’s import from China increased from 62 million USD in 2000 to 1.855 billion USD in 2003,
accounting for 4% and 8% of Pakistan’s total import the same year respectively. Pakistan’s import from China
is diversified. As shown in Table2-3, the main imports are machinery and electronics, textiles, apparel and
footwear, vehicles and transportation equipments and medicine. Some of the products have already gained an
important position in Pakistan’s import market. In 2003, Pakistan’s import of rail locomotives from China
accounted for 72.8% of the total import of the same product that year, the percentage of fertilizer was 61.9%;
inorganic chemicals, 38.3%, air conditioners, 34.1%, electronic communication equipments, 18.5%; rubber
articles, 18.2%; textile machines, 9.7%; organic chemicals, 8.2%; textiles, 7.9% and automobiles, 4.3%.

Table2-3 Top 10 commodities exported from China to Pakistan in 2003

Share ofTariff rate of

Pakistan Pakistan
Value(USD Value growth ’s total
No. Name
10,000) （%） import
from
China

Machinery and 41.

1 76821.7 50.0 5-35
electronics 41

8.0
2 High-tec products 14908.9 5.8 5-25
4

6.4
3 Textile and textile articles 11922 96.8 5-25
3

Articles of apparel and 5.5

4 10299.9 571.5 25
clothing accessories 5

3.8
5 Steel 7097.3 389.3 10-25
3

Textile machines and 3.7

6 6961.4 101.2 5-25
parts 5

2.6
7 Footwear 4934.9 360.4 25
6

1.6
8 Medicine 3125.2 25.9 5-20
8

1.3
9 Television 2441.6 235.6 25
2

Parts of motorcycles and 1.3

10 2431.4 38.5 20-35
bicycles 1
3. Mutual Investment
In recent years, China and Pakistan have witnessed steady growth in mutual investment, however the scale of
investment was small. By 2004, the Chinese enterprises approved or recorded by the Ministry of Commerce in
Pakistan totaled 34, with Chinese contractual investment of 104.11 million USD. At present, China’s
investment in Pakistan mainly covers the following areas: port construction, exploring of coal and other
resources, nuclear power station, hydroelectric power station, ship, machinery, infrastructure construction and
agriculture. Pakistan has invested 96 projects in China, with a contractual value of 71.48 million USD, and an
actual investment of 17 million USD.

Pakistan is the largest market for China to operate international project contracting in South Asia. By 2004,
China’s accumulative labor contracting value was 7.24 billion USD, the turnover was 5.99 billion USD,
among which the project contracting value was 7.16 billion USD and the relevant turnover was 5.92 billion
USD.

Table2-4 Mutual investment between China and Pakistan

Pakistan’s investment in
2003 2004 By 2004
China（10,000 USD）

Number of projects 19 21 96
Contractual value 1949 3210 7148
Actual investment 343 454 1700
China’s investment in 2003 年 2004 年 By 2004
Pakistan (10,000 USD)
Number of projects 4 3 34
Contractual value 930 7344 10411

4. Sound political relations and economic complementality

China and Pakistan are long-term friendly neighbors; their friendship dates back to ancient times and has stood
the test of history. Compared with the close political relations, the economic and trade ties between China and
Pakistan is lagging behind. In recent years, bilateral trade has increased by a large margin, but the total volume
has still been small. In general, China and Pakistan are highly complementary in terms of trade in goods. As a
large manufacturing power, China badly needs Pakistan’s cotton yarn and mineral resources; while Chinese
machinery and electronics, high-tec products and textile apparel have a large market in Pakistan. The two sides
have some areas for investment, which are also highly complementary to each other. China’s capital,
technology and advantage in price make competitive in the investment, designing, and operation of ports,
power plants and infrastructure in Pakistan.

Chapter III Trade and Investment Policies Regime

Since 1978 when China set opening-up as the fundamental state policy, China has been unswervingly pushing
forward trade and investment liberalization, continuously reducing tariffs and non-tariff barriers, expanding
market access to trade in services, improving investment environment and deepening reform in administrative
regime. Currently, an effective trade and investment policy regime has already been set in China and is being
improved.

I Trade Policy Regime: Formulation and Implementation

China has put in place a centralized regime for foreign trade policies. To ensure the consistency of foreign
trade policies, regime and legislations, all the rules and systems relating to foreign trade and economic
cooperation are subject to adoption by the National People’s Congress or its standing committee or the State
Council, and shall be enforced by the Ministry of Commerce under the authority of the State Council. As part
of China’s steady efforts to improve the consistency and transparency of the legal regime in foreign trade, all
foreign trade and economic laws, regulations, policies and rules shall be made public. After its accession to the
WTO, the Chinese government has amended five legislations with respect to foreign trade. The amendment to
the Foreign Trade Law, in particular, materializes the WTO commitments made by China on the areas of
providing consistency and transparency of foreign trade regime, liberalization of foreign trade right, lowering
of market-entry threshold, and protection of intellectual property right, and therefore defines the legal
framework for foreign trade which is needed in the course of China’s integration with the world economy.

According to the function arrangement among Chinese government agencies, the Ministry of Commerce is
mainly responsible to study and formulate foreign trade policies, strategies and development plans. In
formulating trade policies, it shall consult with relevant government agencies on the issues concerning macro
economic administration, finance and taxation, industrial administration, customs and commodity inspection.
In studying policies, it shall hear the opinions of the experts from a variety of sectors, including government
think-tank, academics, business associations and chamber of commerce. Generally, the Ministry of Commerce
will formulate laws and regulations and supervise its enforcement, which is carried out by the chamber of
commerce in the import and export area with the view to make them well positioned to coordinate, guide and
advise on foreign trade activities.

China’s foreign trade is a liberalized sector but subject to macro regulation. The basic policy is to maintain an
overall balance between imports and exports. In administration of foreign trade, China uses legal and economic
measures with the support of administrative measures on the areas of exchange rate, interest rate, duty tariff
and credit facility. Centralized management by state-owned trading companies are required for a limited
number of crucial commodities which are either key materials for state development and people’s life,
strategically important, manipulative in the world market, or dominated by China in international market.
Quota- or license-based administration is applied to certain goods that are subject to the control of aggregate
trading volume. Statutory inspection is required for certain commodities. All foreign enterprises are now
allowed to engage all foreign trade businesses. On the service area, geographic and market-entry restrictions
are gradually lifted and foreign investors are permitted to take more stake in joint ventures. China has
implemented a new tax rebate regime for exports since January 1, 2004.

Foreign Investment. China often resorts to legal or economic measures in its macro regulation of foreign
investment. The State Development and Reform Commission, the Ministry of Commerce and other relevant
authorities will publish on a regular basis the catalogue stating in which industries foreign investors are
encouraged, restricted or forbidden to invest. Foreign investors are granted with tax break in China. In addition
to absorb foreign direct investment, China also endeavors to obtain foreign loans. Only export and import of
technologies that are key to economic development and state interest are subject to the government guidance.

By the middle of 1990s China’s foreign trade business had been dominated by state-owned trading companies.
Since then many manufacturing enterprises have been permitted to conduct foreign trade due to the strong
expansion of foreign trade business in China and also the accession to the WTO. In order to survive and grow
under such market environment, large state-owned foreign trade companies have expanded their businesses
from pure trading to manufacturing and other areas. Certain foreign trade companies have been restructured
into limited liability company or joint stock company characterized by ownership of operation, finance,
development and business control.

Most of China’s trade business involves competition among foreign invested enterprises, private companies
and state-owned trading enterprises. The import and export of certain commodities, including oil, petroleum,
fertilizer, grain, cotton, sugar, vegetable oil and tobacco, are still subject to state control and limited to state-
owned trading companies, although a certain percentage of imports may be conducted by non-state-owned
trading enterprises. The control on vegetable oil will phase out by 2006. China will publish on a quarterly the
import requests raised by non-state-owned trading companies and the license then issued, as well as the
information relating to such requests.

II Measures Affecting Trade in Goods

1. Tariffs
China adopted the Harmonized Commodity Description and Coding System ("HS") on 1, January 1992 and
joined the International Convention on the Harmonized Commodity Description and Coding System the same
year. Subsequently, China began to compile Customs Import and Export Tariff and the Directory of Customs
Statistics Commodity.

China's tariff policy is to promote economic reform and opening of the economy. The purpose of levying tariffs
is twofold: a) to regulate imports so as to promote and support domestic production; and b) to serve as an
important source of revenue for the treasury of the central government.

Bound tariffs are for all products in China. In recent years China has dramatically lowered its simple average
import duties (Table3-1). In 2002, the average tariff rate was reduced from 15.3% to 12.0%, a reduction of 21.6
percentage points; in 2003, the rate was reduced by 8.3 percentage points, from 12.0% to 11.0%; in 2004, the
rate was further reduced to 10.4%, among which the tariff of manufactured products is 9.2% and agricultural
products 15.1%. China’s Commitments to WTO on Tariff Level after 2004 follow in Table3-2.

Table 3.1 Changes of Tariff Level in China since 1992

Date Number Of Decreased Tariff Average Import Tariff Reduction
Headings Rate
31, Dec, 1992 3371 35% 18.98%
1, Apr, 1996 4974 23% 34.29%
1, Aug, 1997 4874 17% 26.09%
1, Jan, 2001 3462 15.3% 10%
1, Jan, 2002 5332 12% 21.15%
1, Jan, 2003 3019 11% 8.3%
1, Jan, 2004 2414 10.4% 5.6%
1, Jan, 2005 10.1%

Source: Ministry of Commerce

Table 3.2 China’s Commitments to WTO on Tariff Level (%)

 Year Average import tariff
Average import tariff rate Average import tariff rate of
rate of manufactured products agricultural products
2005 10.1 9.3 15.5
2006 10.1 9.3 15.5
2007 10.1 9.3 15.5
2008 10 9.2 15.1
Source: Protocol on the Accession of the People’s Republic of China
In 2004 Customs Import and Export Tariff of the People’s Republic of China, import tariffs include MFN rate,
Bangkok Agreement rate and common rate, while the China-ASEAN FTA early harvest rates and CEPA rate
are listed in the appendixes. In terms of No. 84 Proclamation of the General Administration of Customs of the
People’s Republic of China in 2003, China continues to carry out regional or bilateral tariff rates on some
goods from 1, January 2004. Under the frame of Bangkok Agreement, the imported goods under 902 tariff
items originally produced or manufactured in Korea, India, Sri Lanka, Bangladeshi and Laos are eligible for
Bangkok Agreement rates. And China gives more preferential duty to imported goods under 20 tariff items
originally produced or manufactured in Bangladeshi. Based on Preferential Trade Arrangement between China
and Pakistan, Bangkok Agreement rates are applicable to the above imported goods originally produced or
manufactured in Pakistan. Simultaneously, in light of Framework Agreement on ASEAN and China Economic
Cooperation, in 2004 some imported goods originally produced or manufactured in 9 countries of ASEAN,
namely, Vietnam, Thailand, Singapore, Malaysia, Indonesia, Brunei, Burma, Laos and Cambodia apply to
China-ASEAN FTA early harvest rates. But to different country it means different goods and rates. Under this
frame China also gives more preferential duty to imported goods under 238, 330 and 131 tariff items originally
produced or manufactured in Laos, Cambodia and Burma respectively. According to CEPA between the
mainland of China and Hong Kong and Macao, zero tariffs apply to 273-heading imported products (China’s
2001 customs tariff) originally produced or manufactured in Hong Kong and Macao respectively from 1,
January 2004. And no later than 1, January 2006, zero tariffs will apply to all the other products originally
produced or manufactured in Hong Kong and Macao.

Furthermore, in China the majority of products are free of export duty, although 84 items including tungsten
ore, ferrosilicon and some aluminum products are subject to export duties. The customs value of exported
goods is the F.O.B. price of the goods.

According to the Regulations on Import and Export of Goods of P.R.C, the import and export of goods are
divided into prohibited import and export, restricted import and export, free import and export, tariff quota,
state trading and designated trading, import and export monitoring and temporary measures as well as foreign
trade promotion. This Regulation also clarifies the import and export quota, principles for licensing and
application procedures.
1. (1) Taxes and Duties
There are about 8 categories of taxes in Chinese taxation system. Three major types of taxes are levied on
products and services: a) VAT levied on goods and services for processing, maintenance and assembling; b) the
Consumption Tax on some selected consumer products; and c) the Business Tax on providing services,
transferring intangible assets and selling real estate. Both the VAT and the Consumption Tax are applicable to
entities importing goods. VAT and the Consumption Tax on imported goods are collected by the General
 Administration of Customs at the point of entry. VAT is reimbursed once goods are exported. Exported goods
are exempted from the Consumption Tax.

As for the taxation authority, the State Council determines all policies concerning the levying of VAT and the
Consumption Tax, adjustment of tax types and tax rates (tax values), as well as the tax exemption of VAT, the
Consumption Tax and the Business Tax. The laws and regulations are interpreted and implemented by the
Ministry of Finance and the State Administration of Taxation. VAT and the Consumption Tax are levied and
administered by the State competent departments of taxation, while the Business Tax is collected and
administered by the local competent departments of taxation.

The followings are the scopes and rates of VAT, the Consumption Tax and the Business Tax (table 3.3, table3. 4
and table3. 5).

Table 3.3 Scopes and Rates of VAT

Items Rates

Exported goods (except those to which there are other national prescriptions) 0

1 agricultural, forestry, livestock and aquacultural products

2 edible plant oil and stated foodstuff products；
3 water, central heating, air conditioning, hot water, gas, LPG, natural gas, methane, civil coal products
13%
4 books, papers, magazines (except newspapers and periodicals issued by post office)
5 feedstuff, fertilizer, pesticide, agricultural machinery, agricultural plastic film
6 products of mineral and non-mineral, coal

crude oil, well salt and other goods not mentioned above，services of machining, repair, make repairs
17%
and supply replacements。
Source：www.tax861.gov.cn

Table 3.4 Scopes and Rates of the Consumption Tax

Items Rates（duty level）
Tobacco
1 first-class cigarette 50%
2 second-class cigarette 40%
3 third-class cigarette 25%
4 cigar 25%
5 tobacco filament 30%
Wine and alcohol
1 foodstuff distilled spirit 25%
2 potato distilled spirit 15%
3 yellow wine 240yuan RMB/ton
4 beer 220yuan RMB /ton
5 others 10%
6 alcohol 5%
Cosmetic 30%
 Skin and hair protection Products 8%*
Precious bijouterie and jade
1Gold &silver ornaments 5%
2 others 10%
Firecracker, firework 15%
Gasoline
1 no-lead gasoline 0.2yuan RMB /liter
2 lead gasoline 0.28yuan RMB / liter
Diesel oil 0.1yuan RMB /liter
Automobile tire 10%
Motorcycle 10%
Car 3%、5%、8%**

*: Fancy soap: temporarily reduced, tax rate is 5%; **: According to type and cylinder volume. Source:
www.tax861.gov.cn
Table 3.5 Scopes and Rates of the Business Tax
Items Rates
1、Transportation 3%
2、Construction 3%
3、Finance And Insurance 8%
4、Telecommunication 3%
5、Culture And Sporting 3%
6、Entertainment 5%—20%
7、Services 5%
8、Transferring Intangible Assets 5%
9、Selling Real Estate 5%
Source: www.tax861.gov.cn
2. Prohibited Imports
China prohibits or restricts the importation of certain commodities, including weapons, ammunition and
explosives, narcotic drugs, poisons, obscene materials and those foodstuffs, medicines, animals and plants
which are inconsistent with China's technical regulations on food, medicines, animals and plants. Up to now
China has promulgated five batches of imported goods which are prohibited. They are rhino horns, tiger bones,
urban waste, clinic waste, used clothing, used machinery and electronic products and etc.

3. Import Licensing
In order to safeguard national security and social welfare, to protect the ecological environment for human
beings, to observe the international conventions and agreements that the Chinese government has signed up to
or participated in, and to promote the development of economy and trade, the Chinese government has
promulgated a series of regulations and administrative measures concerning imported goods, including import
quota, specific tendering, import licensing, automatic import licensing and TRQ(Tariff Rate Quota). China has
simplified the administration procedures for import of goods. And all these import licensing administration s
are undertaken in a uniform, transparent, equitable and non-discriminatory way and apply equally to products
made in or originating from all WTO members. What calls our attention is that the effect on trade by the
administration is very weak. For example, the amount of machinery and electronic products subject to the
administration of import quota and licensing constitutes only 3% of the total amount of machinery and
electronic products.

4. Quotas

According to China’s commitment to the WTO, China eliminated all the non-tariff measures, quotas included
since I January, 2005; however, within a certain period of time, 6 categories of products including grain,
cotton, plant oil, sugar, wool and fertilizer are subject to the administration of import tariff rate quota. The
deadline of tariff rate quota administration is from the date when China accessed to WTO to 2004 or to 2006.
And the tariff rates of in-quota and out-quota are different (table 3-6). In 2003 the value of imported goods
under administration of tariff rate quota amounts to 5.48 billion dollars, about 1.3% of the total value of
imported goods in China. In 2004 ten kinds of agricultural products and three kinds of fertilizers continue to be
subject to the administration of tariff rate quota. The in-quota tariff rate of sugar decreases from 20% to 15%,
while that of other relative goods keeps unchanged.

Table 3.6 products under administration of tariff rate quota

Description Of Tariff Quotas In In-Quota Tariff Out-Quota Tariff Implementation
Products 2004 Rate Rate Period
Wheat 9,636,000 mt 1%—10% 65%-71% 2004
Corn 7,200,000 mt
Rice 2,660,000 mt 1%—9% 65%-71% 2004
Soybean Oil 3,118,000 mt After 2006, single
Palm Oil 2,700,000 mt 9% 19.9%-52.4% tariff rate 9%

Rape-Seed Oil 1,126,600 mt

Sugar 1,945,000 mt 15%-20% 50%-60.4% 2004
Cotton 894,000 mt 1% 40%-54.4% 2004
Wool 287,000 mt 1% 38% 2004
Wool Tops 80,000 mt 3% 38% 2004
Ammonium 5,400,000× （ 1+5 4% 50% 2006
primary %）3 mt
phosphate
Carbamide 2,300,000 mt 4% 50% 2006
Compound 2,700,000× （ 1+5 4% 50%
Fertilizer %）3 mt
Source: Protocol on the Accession of the People’s Republic of China

5. Import and Customs Procedures

China joined the International Convention on the Simplification and Harmonization of Customs Procedures in
1988 and on 15, June 2000 signed the Protocol on the Amendment of the International Convention on the
Simplification and Harmonization of Customs Procedures. The Customs authorities of China have only
adopted such customs formalities as declaration, examination, levying of duties and release which are
consistent with international practices.
The overwhelming majority of China's customs duties are ad valorem duties. The customs value of imported
goods is assessed according to the C.I.F. price based on the transaction value, as defined in the Customs
Valuation Agreement. If the transaction value of imported goods can’t be determined, the customs value will
be determined by other means provided in the Customs Valuation Agreement. The Customs Law provides for
appeal procedures. In the event of a dispute over calculation of duty paid or payable with the Customs, the
importer can apply to Customs for a reconsideration of the case. If the appeal is rejected, the importer can sue
at the People's Court.

In addition, China apply the provisions of the Decision on the Treatment of Interest Charges in Customs Value
of Imported Goods and the Decision on the Valuation of Carrier Media Bearing Software for Data Processing
Equipment both adopted by the WTO Committee on Customs Valuation.

6. Export Subsidy and Domestic Subsidy

China commits that it annuls all the export subsidies prohibited by SCM (the Agreement on Subsides and
Countervailing Measures), and notifies other subsidies permitted by SCM. China eliminated its export
subsidies for agriculture products as early as the beginning of 1990’s and committed not to resume agricultural
export subsides.

The subsidy items that are consistent with the WTO rules have been listed in the Annex 5A of the Protocol on
the Accession of the People’s Republic of China.

7. TBT
Since 1980, China has always taken international standards as the basis for technical regulations, and takes this
as an import technical and economic policy. Relevant laws and regulations of China request a review of
technical regulations at least every 5 years, so as to ensure that they meet the demand of economic
development and be consistent with the international standards.

According to provisions of the Standardization of the People's Republic of China, there are two types of
standards in China: mandatory and recommendatory. Mandatory standards in China are directly related to
legitimate objectives such as product safety, health and environmental protection and etc., and their
implementation is mandatory, therefore the essence of which complies with the meaning of "technical
regulation" under the TBT Agreement. The technical requirements on products in technical regulations in
China are all based on mandatory standards. The information on preparation and revision of mandatory
standards and adopted standards are timely published on AQSIQ (the General Administration of Quality,
Supervision, Inspection and Quarantine) Gazette and /or China Standardization and /or the SAC (the
Standardization Committee of the People's Republic of China) website. Recommendatory standards in China
are full conformity with standards under the TBT Agreement, and all of them follow the relevant guides and
recommendations of ISO and IEC. China committed to increase 10% of its technical regulations taking
international standards as the basis within five years after its accession. In order to honor its commitment to the
WTO, China has built a unified certification and accreditation system that is in conformity with WTO rules
and includes China Compulsory Certificate System (CCC). At present, 21 categories of products are subject to
the CCC.

8. SPS

China applies SPS measures only to the extent necessary to protect the life and health of human beings,
animals and plants. And China has made every effort to base its SPS measures on international standards,
guidelines and recommendations. In 2002 SAC worked out the target of adopting international standards. By
the end of 2005, the ratio of standards which are international standards based will reach 70% on the whole
and 75%—80% in important fields, such as SPS field. There are designated SPS enquiry points in MOFCOM
and AQSIQ.

For standard harmonization, China has taken many steps to base its SPS measures on international standards.
Article 10 of ''the Law on Standardization of the People's Republic of China" stipulates that relevant
international standards should be taken into account while developing national standards. In 2001 SAC within
AQSIQ was established, which is specifically responsible for the administration of Standardization in the
whole country and for promoting an active participation in the international standard and alignment of national
standard to international standards. "Rules on Management of Adopting International Standards" promulgated
by AQSIQ in the same year stipulated explicitly the principles and procedures for adopting international
standards.

As far as the consistency is concerned, local regulations and standards in SPS field shall conform to the
national laws, regulations and standards relating to SPS, as well as the WTO Agreement. The consistency of
legal system and standards in China effectively ensures it.

9. ROO

Since mid 1980's, China has promulgated series of related documents, which can be divided into non-
preferential and preferential rules.

The non-preferential documents include Provisional Regulations Concerning the Rules of Origin of the
Customs General Administration of the People's Republic of China (1986), Proclamation Concerning Change
of the Rules of Origin for Petroleum Products of the Customs General Administration of the People's Republic
of China (1992), Proclamation of the Customs General Administration of the People's Republic of China on
Establishment of Pre-determination on Origins of Imports (No. 17, 2001).

The followings belong to the preferential ones, namely, Provisional Rules of Origin of the General
Administration of Customs of the People’s Republic of China for Imports under Agreement on Trade
Negotiations among Developing Member Countries of the Economic and Social Commission for Asia and the
Pacific (2001), Rules of Origin of China-ASEAN FTA under the Framework Agreement on ASEAN and China
Economic Cooperation （ 2003 ） , Standards of Hong kong Origin Products Sharing Preferential Trade
Measures（2004）, and Standards of Macao Origin Products Sharing Preferential Trade Measures（2004）.
The existing non-preferential ROO for the export of goods was issued on March 8, 1992, and began to take
effect on May 1 that year. This rule applies to the situation when exporters request the issuing of China ’s
certificate of origin for the non-preferential goods.

Chapter III Foreign Investment Regimes

The Chinese government encourages foreign investment in the Chinese market, and has continuously
liberalized and expanded the fields for investment. The Industrial Catalogue for Guiding Foreign Investment
has been revised twice since 1997. The 2nd revision of the Provisional Regulation on Foreign Investment
Guidance and the 3rd Industrial Catalogue for Guiding Foreign Investment have been completed in 2002 and
took effective on April 1, 2002. In recent years, China has liberalized further the restrictions imposed on the
proportion of foreign equity in investment projects and opened new sectors to foreign investment. The newly –
opened sectors include telecommunications, urban water supply and drainage, construction and operation of
gas and heat distribution network, which all were previously prohibited from any foreign investment. China
has also opened further such service sectors as banking, insurance, distribution, trading right, tourism,
telecommunications, transportation, accounting, auditing and legal services. The timeframe and pace of
opening of these markets has been contained in annexes to industrial catalogue for Foreign Investment.

The basic laws in China concerning foreign investment are: Law of People’s Republic of China on Chinese-
Foreign Equity Joint Venture; Law of People’s Republic of China on Chinese-Foreign Contractual Joint
Venture; and Law of People’s Republic of China on Wholly Foreign Owned Enterprises. These three basic
laws on FDI have stipulated that the State will not nationalize or expropriate any foreign invested enterprises.
Only under special circumstances, for the requirement of social and public interests, foreign invested
enterprises may be expropriated in accordance with legal procedures, and appropriate compensation shall be
provided.

Upon approval of the National People’s Congress and its Standing Committee, China has revised the following
laws and regulations at the time given: in October 2000, Law of People’s Republic of China on Chinese-
Foreign Contractual Joint Venture; in October 2000, Law of People’s Republic of China on Wholly Foreign
Owned Enterprises; in March 2001, Law of People’s Republic of China on Chinese-Foreign Equity Joint
Venture; and in July 2001, Implementation Rules on Law of People’s Republic of China on Chinese-Foreign
Equity Joint Venture, including the elimination and cessation of enforcement of requirements on trade and
foreign local content, export performance, compulsory technology transfer, and etc. Chinese authorities would
not enforce the terms of contracts containing such requirements. The allocation exchange balancing,
permission or rights for importation and investment would not be conditional upon performance requirements
set by national or sub-national authorities, or subject to secondary conditions covering, for example, the
conduct of research, the provision of offsets or other forms of industrial compensation including specified
types or volumes of business opportunities, the use of local inputs or the transfer of technology. Permission to
invest, import licenses, quotas and tariff rate quotas would be granted without regard to the existence of
competing Chinese domestic suppliers.

In China, foreign invested enterprises mainly include wholly foreign-owned enterprises, equity joint venture
and contractual joint venture. China keeps on searching new forms of FDI. The regulations on setting up
venture capital companies, foreign invested share companies and foreign invested holding companies have
been either promulgated or complemented. The function for Foreign Invested Holding Companies has been
further expanded. China has issued the regulation on M&A which allows foreign investors to use is the way of
M&A to set up foreign invested companies in China. Foreign investors are encouraged to take part in the
restructuring and reform of State-owned Enterprises. Up to now, the government allows foreign investors to
play a role in the restructuring and disposal of the assets owned by the Asset Management Corporations.

Examination and approval procedures are required by the Government for setting up foreign invested
enterprises. Efforts have been made to further streamline the examination and approval procedures based on
the expansion of the approval authorization from central government to provincial governments for all FDI
projects in the encouraged category of the Industrial Catalogue for Guiding Foreign Investment with no limit
on its investment scale and these projects are not subject to national planning. Many provinces can provide
one-stop shop services and each province has set up the investment promotion center to help investors.

For foreign investment, China abides by MFN and National Treatment requirements. Efforts have been made
to keep the continuity and stability of the FDI policies. Currently Foreign invested enterprises still enjoy
preferential treatments in terms of taxation etc. comparing with domestic enterprises. The Dispute Settlement
Centers for Foreign Investors/foreign invested enterprises have been established at both central and provincial
level to help investors solving problems.

II. Special Investment Regimes and Zones

China had established a number of special economic areas where more open policies were applied. They
included five SEZs (Special Economic Zones), 14 open coastal cities, six open cities along the Yangtze River,
21 provincial capital cities and 13 inland boundary cities. Those special economic areas enjoyed greater
flexibility in utilizing foreign capital, introducing foreign technology and conducting economic cooperation
overseas. At present, foreign investors were entitled to certain preferential treatment. FIEs (Foreign invested
enterprises) located in SEZs or the Economic and Technical Development Zones of open coastal cities were
entitled to a corporate income tax rate of 15 Percent (the normal income tax was 33 percent). Profits remitted
abroad by foreign investors were exempted from income tax. The preferential income tax rate of 15 percent
was applicable to technology-intensive or knowledge-intensive items or projects with foreign investment of
over US$30 million, as well as enterprises that operated in the fields of energy, transport and port construction.
By the end of August 2003, China has signed 106 Bilateral Investment Protection Agreements with other
economies. The issues of expropriation and compensation and the issues of protection from strife and similar
events have been stipulated in bilateral investment protection agreements signed between China and other
economies. All these agreements have provisions for settlement of disputes. Most of Bilateral Investment
Protection Agreements with other economies include the clause in enabling disputes between a foreign investor
and China to be referred by the investor to ICSID.
Table 3-7 Laws and Regulations on Foreign Investment

Source: Ministry of Commerce of the People’s Republic of China

Regulation Date
Law on Chinese-Foreign Equity Joint Venture amended on 15 Mar 2001
Regulations for the Implementation of the Law on Sino-Foreign Equity
amended on 22 July 2001
Joint Venture
Law on Chinese-Foreign Contractual Joint Venture amended on 31 Oct 2000
Regulations for the Implementation of the Law on Sino-Foreign
effective 04 Sep 1995
Contractual Joint Venture
Law on Foreign Capital Enterprises amended on 31 Oct 2000
Regulations on the Implementation of the Law on Foreign Capital
amended on 12 Apr 2001
Enterprise
effective 1 Apr 2002
Provisions on Guiding Foreign Investment Direction

Industrial Catalogue for Foreign Investment effective 1 Apr 2002

Provisional Rules on the Establishment of Foreign Funded Conference
effective 12 Feb 2004
and Exposition Corporations
Revised Rules on the Establishment of Investing Corporation by
effective 14 Mar 2004
Foreign Investors
Chapter IV Trade in Services

Generally speaking, the liberalization of trade in services is a hard nut in FTA negotiations, however it’s easier
for China and Pakistan to negotiate on this issue. The reason is: on the one hand, China has honored its
commitment to WTO and made progress in liberalizing trade in service; on the other hand, China and Pakistan
are highly complementary to each other in trade in services, and the probable negative impact brought about by
the liberalization of this field will be limited.

The total volume of China’s trade in services in 2003 was 102 billion USD. China is the 9 th largest country in
terms of trade in services and is the largest developing country in terms of the export volume of trade in
services. The import and export volume of tourism and transportation account for 31.9% and 25.6% of the total
volume of trade in services, or 57.6% of the total.

Table4－1 China’s trade in services in 2003 (10m USD)

Name Import& Export Export Import Gap

 Volume Growth Volume Growth Volume Growth
rate % rate% rate%
Trade in 1020.32 18.3 467.30 17.6 553.02 18.9 -85.72
services
Transportation 261.39 35.2 79.06 38.2 182.33 33.9 -103.26
Tourism 325.93 -8.9 174.06 -14.6 151.87 -1.4 22.19
Communication 10.66 4.4 6.38 16.1 4.27 -9.2 2.11
Construction 24.73 11.9 12.90 3.5 11.63 22.8 1.06
Insurance 48.77 41.2 3.13 49.7 45.64 40.6 -42.51
Finance 3.77 167.6 1.48 197.9 2.29 154.4 -0.80
Source: Ministry of Commerce Of P.R.C

1. Business Services
China has gradually opened this area and made great progress in recent years. It has eliminated the quantitative
and geographical limitations on foreign law firms and allow them to establish the second representative office
in China; reduced the limitations on representatives’ professional years, and simplified the administrative
departments and streamlined the registering procedures. In terms of accounting and management consultancy
services, China allows foreign accounting firms to partner with any Chinese entity of their choice and agreed
to abandon the prohibition on foreign accounting firms’ representative offices engaging in profit-making
activities in its WTO commitments. Foreign accounting firms can also engage in management consulting
services and taxation, without having to satisfy the more restrictive requirements on form of establishment
applicable to new entities seeking to provide those services separately.

2. Telecommunications and Audiovisual Services

China also accepted key principles from the WTO Agreement on Basic Telecommunications Services when it
acceded to the WTO. In order to abide by these key principles and its commitments, China has separated post
and telecommunications services and spilt China Telecom, the country’s largest telecommunications company,
into northern and southern parts. The consolidation of the major operators has basically finished, and regional
restriction is being gradually removed.

In recent years, Chinese telecommunication equipment providers represented by Huawei have made some
achievements in tapping markets in developing countries. For example, n 2004, the Mobile Communication
Base Stations exported from China to Pakistan valued 17.18 million USD. Since Pakistan has already ended
the monopoly of PTCL in 2003 and has promulgated policies to liberalize telecommunications industry, China
and Pakistan could enhance cooperation in the field of telecommunications base on the relevant trade.

China’s new Regulations on the Management of Film and Regulations on the Administration of Audio-Visual
Products went into effect on February 1, 2002. They are designed to bring more transparency and order to the
film and audio-visual industries, with an eye to moving toward greater commercial efficiency in accordance
with domestic reform efforts and WTO commitments.
3. Construction and Related Engineering Service
Foreign enterprises are basically granted national treatment in this field. According to the Guide for the
Investment of Foreign Businessmen in Industries, the share options of foreign enterprises are restricted in the
construction and operation of urban gas and heating and water supply and drainage network.

At present, the bilateral trade in this field is dominated by China’s export to Pakistan. In 2003, China and
Pakistan have signed 62 project contracts with a contractual value of over 400 million USD. The finished
contractual value and labor service cooperation value exceeded 600 million USD in 2003. Currently, the
projects in operation or to be started between China and Pakistan include: the Gwadur Port, Jinnah hydro
electronic power station, Thar coal power station, Chashma nuclear power plant, which involve a large amount
of investment.

Table 4-2 Contracted projects and labor service cooperation between China and Pakistan (1999-2002)

Type 1999 2000 2001 2002

Turnover of contracted 30577 32042 42044 35455
projects（10.000 USD）

Labor service 86 503 287 160

cooperation（10,000 USD）
Turnover of consultancy and 135 396 158 117
design（10,000 USD）
Number of person engaged in 1119 951 832 1641
contracted projects in Pakistan by
the end of the year
Number of person engaged in 263 296 154 214
labor service cooperation in Pakistan
by the end of the year
Number of person engaged in 33 83 缺 19
consultancy and design in Pakistan
by the end of the year

Source: China Foreign Economic Statistical Yearbook,2003

4.Financial Services

Honoring its commitment to the WTO, China is now gradually liberalizing financial, securities and insurance
sectors. At present, there is a large room for China and Pakistan to cooperate with each other in these fields.
The Chinese government has always provided non-reimbursable assistance, interest-free loan and preferential
loan to Pakistan. With the development of the economy in both two countries, trade in financial services will
be developed accordingly. The financial institutions from both China and Pakistan could set representative
offices in the other side and gradually explore ways to cooperate in this field.

5. Tourism and Relating Services

China has made great progress in opening its tourism and travel services. In December 2001, it issued new
travel agency administration regulations to allow large foreign travel and tourism service providers to operate
full-service joint venture travel agencies to promote foreign inbound tourism in the four major foreign tourist
destinations in China: Shanghai, Beijing, Guangzhou and Xi’an. China issued Provisional Measures for the
Establishment of Foreign Controlled and Wholly Foreign funded Travel Agencies, effective July 2003. From
2007, China will allow wholly foreign-invested subsidies and geographical restrictions will be removed.

China and Pakistan are both populous countries with a long history and have vast vista in tourism cooperation.
Pakistan could seize the opportunity of negotiating on FTA to carry out more activities so as to get the Chinese
people know more about its rich national culture and attract more Chinese visitors to Pakistan.

6. Transportation

The regulations on International Maritime Transportation, Provisions on Foreign Investment in Civil Aviation
Industry, and Notification on Further Liberalizing Investment in Road Transportation were promulgated in
2002. These regulations liberalize the fields, ways and proportion of foreign investment.

China and Pakistan enjoy huge potential in further cooperating in marine, air and road transportation. China’s
large state-owned logistics companies have rich experience in logistics and container pier and could provide
services for Gwadur port.

7. International Commitments Related to Services

After accession to WTO, China has continued to participate in WTO working groups on services and
investment. China has also participated in other regional fora, such as the Asia Pacific Economic Forum
(APEC) and Asia-Europe Meeting (ASEM), carrying out important work in said areas and actively
participating in negotiations on services. At bilateral level, China-ASEAN Free Trade Area （CAFTA）has
start-up in order to achieve a better and more profound liberalization of trade, including that of services.

8. Main Fields for Cooperation

Construction and project contracting are the areas with largest potential for cooperation. There is also further
room for cooperation in transportation based on trade in goods, some commercial services,
telecommunications, tourism, and financial sectors. In a word, China and Pakistan need to tap the potential in
the cooperation in service sectors. Sound political relations, close economic development level and increasing
bilateral trade back our confidence that China and Pakistan will see wide-range, mutually beneficial and lively
bilateral trade in services in the future.

Chapter V Main Contents of China Pakistan Free Trade Agreement

I General Targets and Basic Principles

The China-Pakistan Free Trade Agreement aims at the following four targets:

1. Promote trade and investment between the two countries or with the third country through bilateral trade
and investment liberalization;

2. Increase productivity of both sides through competition and scale economy, and create a larger market;

3. Provide an institutional framework for closer economic ties and dispute settlement;

4. Promote regional and multilateral trade liberalization.

This agreement is mutual beneficial to both sides; while promoting economy and improving people’s
living standards in both countries; it should also make contribution for closer political relations between
China and Pakistan.

China and Pakistan are both supporters of multilateral trading system, and have made their own
contribution to the economic reform in Asia and the world at large. Bearing in mind the different economic
scale and product structure of the two countries, China could think more Pakistan in terms of certain
commodities. However, China and Pakistan are in the similar economic development stage, and in the
FTA, both sides have the responsibility to make some adjustment while gaining benefits. Therefore, in the
agreement, China and Pakistan should abide by the following principles:

1. Reciprocity and mutual benefit; the interests of the producers and consumers of the two sides should
not be hampered;

2. The agreement should try to cover a wide range of commodities, trade in services and include broad
topics;

3. The agreement should be consistent with the WTO rules and goals; conform to the Article XXIV of
GATT and Article V of the GATS; embody relevant rules of the Bogar Declaration.

4. In terms of trade diversion, the two sides should exchange information and views on the FTA with the
third country and keep a balance on some articles.

II. Liberalization of trade in goods

1. Early Harvest Program

At present, the Early Harvest Program mainly covers trade in goods and in-land port customs clearance.

As for trade in goods, the one-package tariff reduction modality could cover Pakistan’s main exports to China,
such as textiles, copper and the articles thereof, Chromium ores, fruits and vegetables, marble, granite articles
and sports requisites.

The in-land port at the junction of boundary of Pakistan and China could adopt some measures to facilitate
customs clearance.

2. ROO, SPS, Food Safety, Anti-dumping, and Subsidy

The existing non-preferential ROO for the export of goods in China was promulgated in1992. It applies to the
situation when exporters request to issue certificate of origin for non-preferential goods, and is not binding for
importers. China customs does not require the declaration of origin on exported goods.

In terms of SPS, China has always committed its self to coordinating national and international standards. The
Standardization Administration of China is in Charge of standardization in China and also actively participates
in the formulating of international standards. At present, the rules and procedures for formulating standards in
China have already been in conformity with that of the international standards. The standards of different
regions in China are also consistent with each other.

In recent years, some countries put much unrealistic blame on China-Pakistan trade in certain special goods. In
the FTA, both sides should be responsible and put stricter provisions on trade in special goods.

3. Trade Balance

In the bilateral trade between China and Pakistan, China has always enjoyed a relatively large surplus, which is
on the increase year by year. In 2002, 2003 and 2004, the trade surplus reached 680million, 1,28 billion, and
1.87 billion USD respectively.

China and Pakistan have large scale of foreign exchange reserves; therefore trade surplus or deficits do not
have great impact on the economy of both countries. Of course, China attaches great importance to the issue of
trade unbalances with Pakistan and has adopted measures to expand import from Pakistan. Chinese companies
are willing to import from Pakistan as long as the products are competitive and can meet the demands of
Chinese market. This issue will be gradually resolved with the further development of trade between China and
Pakistan.
4. Dispute Settlement Mechanism

Ministry of Commerce of P.R.C (MOFCOM and the Tariff Commission under the State Council are in charge
of anti-dumping and countervailing. The Bureau of Trade for Imports and Exports of MOFCOM is responsible
for the investigation of anti-dumping and countervailing; and the Bureau of Industry Injury Investigation in
responsible for the investigation of industry injury. Based on the investigation results provided by MOFCOM,
the Tariff Commission decides whether levy anti-dumping and countervailing tariffs.

The WTO multilateral trade dispute settlement mechanism could play its role in the probable trade dispute
between China and Pakistan. However, it’s more important for China and Pakistan to negotiate on dispute
settlement mechanism. Relevant departments of the Ministry of Commerce could consider setting special
committee on trade dispute settlement with Pakistan so as to resolve problems as soon as possible.

III. Trade and Investment Facilitation Measures

1. Customs Procedures

On 1 January 2002, China Customs has started its full implementation of the WTO Valuation Agreement across
the country. China Customs continues to review the current valuation procedures and revise the existing Tariff
Regulation so as to have it aligned with the principles of the Valuation Code. Pilot operations were carried out
in some major regions with substantial achievements.

2. SPS

In July 2002, the China Standardization Administration Commission set tar goal of adopting international
standards. By the end of 2005, the ration of international standards adopted will reach 70% on the whole and
75-80% in important fields, such as SPS. China set up the WTO Notification and Enquiry Center immediately
after the accession to provide enquiry service on trade-related information for all members.

At present, the relevant departments of China and Pakistan should enhance cooperation so as to handle
problems properly. China could accelerate inspection quarantine on the agriculture products that are concerned
by Pakistan.
3. Transparency

China has made great efforts to ensure transparency regarding the laws, regulations and other measures that
has issued and implemented. The Government of China regularly issued publications providing information on
China's foreign trade system. There are no foreign exchange restrictions affecting import or export.
Information on China's customs laws and regulations, import and export duty rates, and customs procedures
was published in the "Gazette of the State Council" and in the press media, and was available upon request.
The procedures concerning application of duty rates, customs value and duty determination, drawback and
duty recovery, as well as the procedures concerning duty exemptions and reduction, were also published.
China set up the China WTO Notification and Enquiry Center immediately after the accession to provide
enquiry service on trade-related information for all members, enterprises and individuals.

4. Movement of Business Persons

From the standpoint of movement of business persons, no inconveniences are foreseen for the execution of an
FTA with Chile, as China has made great efforts to facilitate the entry and residence in the past several years,
for example, some special policies have been made to facilitate the entry and residence of the following:
a)Foreign senior management personnel who come to China to carry out agreements signed by China's central
or local governments and foreign governments on major scientific & technological, or key construction
projects at  the state, provincial or ministerial levels according to Chinese standards; b)Foreign qualified
scientists and technicians or high-level management personnel taking posts in China; c)Foreign nationals
coming to China to carry out inter-governmental free aid agreements; d)Foreign investors, especially those
investing in China's western areas; From 1 July 2003, businesspersons holding valid Singaporean and Brunei
ordinary passports are exempted from visas when staying in China for no more than 15 days; From 1
September 2003, businesspersons holding valid Japanese ordinary passports are exempted from visas when
staying in China for no more than 15 days; China joined the APEC Business Travel Card (ABTC) Scheme in
2001, and has issued the card in 2003. China has always taken international standards as the base for technical
regulations, and takes this as an import technical and economic policy. Relevant laws and regulations of China
request a review of technical regulations at least every 5 years, so as to ensure th at they meet the demand of
economic development and be consistent with the international standards.
Chapter VI Impacts of Trade Liberalization on the Trade of Major
Commodities

Though China and Pakistan are highly complementary in commodity structure, a FTA will probably bring
about positive or negative impacts on some producers in both countries. Therefore, it is necessary to make
some assessment on this.

I Agriculture, Fishery and Food Processing

China and Pakistan are both large agriculture countries. Though the percentage of agriculture in GDP is
decreasing year by year in both countries, a large amount of population are still engaged in agriculture. At
present, the gap between China is Pakistan in agriculture development level is small, and bilateral trade in
agriculture products can keep a balance.

In 2005, China continues to set quotas for wheat, corn, rice, cotton, plant oil, sugar and other agriculture
products, and the tariff rates range from 1-15%; while the MFN tariff rates range from 19.9-65%. In addition,
the average tariff rate for the import of vegetables is about 13%. The tariff rates of fruits are around 15-20%.
Therefore, if the tariffs are reduced according to the Early Harvest Program, there will be relatively obvious
trade diversion and trade creation effects in relevant areas. However, the current trade scale is limited, and
China does not need to worry that a FTA will lead to sharp increase of the import of Pakistan ’ agriculture
products, and the agriculture industry in China will not be affected. However ， from the long perspective,
Pakistan’s potential export capacity of aquatic products will probably affect China’s market for aquatic
products to some extent.

The Pakistani commodities that have the greatest potential to be exported to China are tropical fruits. These
fruits are widely planted in Pakistan, and China has already finished quarantine and inspection on Pakistani
mangoes and citrus. After zero tariffs are levied, in North-west China, Pakistani fruits will enjoy certain
advantages in both quality and price compared with the fruits grown in Southern China. Pakistan is also rich in
fishery resources. With the adjustment of the polices on fishery industry, the improvement of technology, the
potential of Pakistan’s fishery industry will be unleashed. After the zero tariff policy is adopted, Pakistan will
see a rise in its export to China.

The state leaders of Pakistan have expressed the willingness to enhance cooperation with China in agriculture.
China could consider set agriculture demonstration areas in Pakistan to plant various vegetables and transfer
technologies to the local farmers so as to reduce trade balances in this field.

Table 6-1 Trade Status of Agricultural, Fishery and Food Processing Products between China and Pakistan in
2004

Unit: 10,000 USD

Category China’s China’s Balance Total
imports exports volume
I. Live Animals; Animal Products 731.2 19.0 -712.2 750.2
II. Vegetable Products 708.9 4984.0 4275.1 5692.9
III. Animal or Vegetable Fats and Oils and 0.0 12.1
Their Cleavage Products; Prepared Edible
Fats; Animal or Vegetable Waxes 12.1 12.1
IV. Prepared Foodstuffs; Beverages, 213.5 559.2
Spirits and Vinegar, Tobacco and
Manufactured Tobacco Substitutes 345.7 772.7
Total 1653.6 5574.3 3920.7 7227.9
Source of data: Ministry of Commerce of the People’s Republic of China

II. Minerals

In 2004, the minerals imported from Pakistan to China reached 26.13 million USD, and the minerals exported
from China to Pakistan valued 37.74 million USD. Chromium ores (22.3 million USD) and crude marble (3.2
million USD) are the major minerals exported from Pakistan to China. Since China has already applied zero
tariffs on major minerals, the FTA will only have limited impacts on the trade of minerals between China and
Pakistan in the short run. However, in the long run, with the increase of China’s demand on minerals and the
improvement of business environment, a FTA will generate positive impacts.

At present, China levies around 10-24% of import tariff on marbles and granite articles. Pakistan is rich in
marbles, and a China-Pakistan FTA will help Pakistan expand export of marbles to China.

Pakistan has a large variety and amount of mineral resources, especially in the boundary provinces in the
Northwest, there are large scale of copper, iron and chromium ores. In recent years, China’s demand on
imported materials has been increasing rapidly. China’s large state-owned enterprises engaged in resource
trading should pay more attention to the China-Pakistan cooperation in trade of minerals. If Pakistan could
address the problems in resource exploration and transportation, it will expect sustained growth in the export of
minerals to China.

III. Chemical and Plastics Articles

The trade of chemical and plastics articles between China and Pakistan is large in scale (as shown in table6-2).
China’s export of these products accounts for nearly 1/5 of the total export. At present, the MFN rate of
chemical products in China is about 5%, and that of plastics articles, about 10%. When the tariff rate is
reduced, Pakistan will expect the increase of the export of some products. Since the scale of Pakistani export to
China is limited at present, the increase will not bring significant negative impacts to Chinese producers.

Table 6-2 Trade Status of Chemical products, Plastics and Articles Thereof between China and Pakistan
in 2004
Unit: million USD
Category China’s China’s Balance Total
imports Exports Volume
VI. Chemical Industry and Products 6.4 338.0
thereof 331.6 344.4
VII. Plastics and articles thereof; Rubber 9.1 111.0
and articles thereof 101.9 120.1
Total 15.5 449 433.5 464.5
Source of data: Ministry of Commerce of the People’s Republic of China

VI Leather Products
Pakistan has obvious advantage in the trade of these products. In 2004, Pakistan exported more than 40 million
US Dollars to China and imported 8.64 million US Dollars from China on these products. Single export
volumes on the tariff items named skins of lamb, bovine animals and equine animals are all around 5 million
US Dollars. At present, the tariffs of China in this product field are from 5% to 15%. After the reduction of the
tariffs, the import of these products is supposed to be increasing remarkably.
The rapid increase of Pakistan’s leather to China will probably affect the livelihood and income of the farmers
in distant areas.

V Woods Products
The trade status on woods products between China and Pakistan is shown in table 6-3. China and Pakistan are
both relatively lacking in woods resource. Woods area and accumulation volume per capita of China are only
20% and 12% compared to the world average level. It is estimated that in the next fifty years, the consumption
on the woods products will be 1.6 times of China’s gross resource of woods. In recent years, the increase of the
woods products supply in China is slowing down, but at the same time the demand of the market to the woods
products is gradually rising. There is a relative big gap between the supply and demand in the market.

According to the situation of China’s woods resource, China has set out very loose trade policies on woods
products. In 2003, China implemented zero tariffs to the import on all categories of rough wood. Since China
has already achieved some development on some compound wood panels, China imposes 4% to 10% tariff on
these products. China imposes no tariff on all imported paper pulp, and only imposes 7% tariff on import of
main kinds of paper. There are no non-tariff barriers of China in woods products area. And the inspection and
quarantine are all complying with international traditions. Therefore, mutual elimination of tariff between
China and Pakistan will not have substantial influence on the trade in this field between two countries.

Table 6-3 Trade Status of Forest Products between China and Pakistan in 2004

Unit: 10,000 USD

China’s
Category China’s Exports Balance Total
imports Volume
IX ． Wood and Articles of Wood; Wood 0.5 426.3 425.8 426.8
Charcoal, Cork and Articles of Cork;
Manufactures of Straw, of Esparto or of Other
Plaiting Materials; Basketware and
Wickerwork
X. Pulp of Wood or of Other Fibrous 0.6 1591.8 1591.2 1592.4
Cellulosic Material; Wasted and Scraped
Paper or Paperboard; Paper and Paperboard
and Articles Thereof
Total 1.1 2018.1 2017 2019.2

Source of data: Ministry of Commerce of the People’s Republic of China

VI Textiles and Textiles Articles

There is a wide prospect of cooperation in the field of textiles products between China and Pakistan. In 2004,
China imported 459 million US Dollars from Pakistan and exported 317 million US Dollars to Pakistan. China
had a trade deficit of 142 million US Dollars. According to the modalities in the industry, two countries have
already formed certain pattern of division of work. This pattern has following two characters:

1. On the varieties, China is mainly exporting silk, wool and chemical fiber fabrics to Pakistan and importing
cotton fabrics from Pakistan;

2. On the manufacturing procedures, China is mainly importing yarn. (Only single import volume on certain
standard combed single-yarn is more that 190 million US Dollars.) And China is mainly exporting fabrics
and clothing.
Therefore, China and Pakistan are more cooperative than competitive in this field. In 2005 the global textiles
articles and clothing will realize integration, which will bring both opportunities and international pressure to
the relative industries of China and Pakistan. Up to now, 115 industry organizations from 65 Countries have
signed on the Istanbul Declaration, requesting WTO to take measures on textiles of China. Take FTA
negotiation as a good opportunity, China and Pakistan should further coordinate on this issue, promoting the
cooperation among the industries, and jointly boycott trade protection from some countries’ government and
industries, through which the implementation of the textile integration will be assured.

In 2005, the MFN tariffs on cotton yarns are 5% to 6%, and tariffs on cotton woven products are 10% to 14%.
Besides, there are no non-tariff measures such as quota or license. Zero tariff policy will decrease the prices of
these products in China and relative demand on import will be increasing. As China, it need to move to the
high value-added production according to domestic industry polices, and continuous leave room in the industry
chain to let those countries with cheaper labor cost to enter the international division of work. It is especially
necessary for China to do so to the friendly country as Pakistan.

VII Footwear, Articles of Non-metal and Precious Metal Products, Base Metal and Articles of Base
Metals

In the trade of these four sections, China has relatively obvious comparative advantage (table 6-4). China is
still imposing certain tariff protection on the products of section 12, 13 and 14. Pakistan exported very small
amount on these three sections. Even if the tariff concession plan in the early harvest plan were extended, the
increase brought by this would still be very limited. Therefore, FTA should provide some FDI encouragement
policies to attract medium and small enterprises of China to invest to Pakistan.

Table 6-4 Trade Status of footwear, Non-metals and Precious Metals and Articles Thereof, Base Metals

and Articles of Articles thereof between China and Pakistan in 2004

Unit: 10,000 USD

Category China’s Balance Total

China’s
Exports Volume
Imports
XII. Footwear, Headgear, Umbrellas,
Sun Umbrellas, Walking-Sticks, Seat-
Sticks, Whips, Riding-Crops and Parts
1.6 3588.0 3586.4 3589.6
thereof, Papered Feathers and Articles
Made Therewith; Artificial Flowers;
Articles of Human Hair
XIII. Articles of Stone, Plaster,
Cement, Asbestos, Mica or Similar
Materials; Ceramic Products; Glass and 22.0 7497.3 7475.3 7519.3
Glassware
XIV. Natural or Cultured Pearls,
Precious or Semi-precious Stones,
Precious Metals, Metals Clad with 0.0 60.7 60.7 60.7
Precious Metals, and Articles thereof;
Imitation Jewellery: Coin
XV. Base Metals and Articles of Base
Metal 3614.4 14600.0 10985.6 18214.4
Total 3638.0 25746.0 22108.0 29384.0
 Source of data: Ministry of Commerce of the People’s Republic of China

In the trade of base metals, only the volume of unrefined copper has already accounted for 90% of the export
of Pakistan. China’s tariff on this category of products is already zero. Under the circumstances that price and
quality of these products are satisfactory, China can expand the import on these products.

VIII Machinery and Electrical Products, Traffic Equipments and Optical Instruments

In 2004, among the total 1.87 billion US Dollars trade surplus of China in the trade between China and
Pakistan, surplus on the following three categories of products are over 1 billion US Dollars. If Pakistan further
reduces the tariff to China’s products, it will result in trade diversion effect, which means parts of the products
imported from Japan and Korea will be replaced by cheaper products from China. China and Pakistan will all
benefit a lot from this.

China and Pakistan should follow the 12 th Bilateral Economic, Trade and Science and Technology Joint
Committee and FTA negotiation, and fulfill the relative plan of setting China industrial park in Pakistan.
Pakistan’s development level can be raised by China’s direct investment in Pakistan.

Table 6-5 Trade Status of Electrical Machinery Products, Transport Equipments, Optical Instruments

between China and Pakistan in 2004

Unit: 10,000 USD

Category China’s China’s Balance Total Volume

Imports Exports
XVI. Machinery and Mechanical
Appliances; Electrical Equipment;
Parts thereof; Sound Reorders and
28.1 81030.0 81001.9 81058.1
Reproducers, Television Image and
Sound Recorders and Reproducers, and
Parts and Accessories of Such Articles
XVII. Vehicles, Aircraft, Vessels
and Associated Transport Equipment 27.6 18203.0 18175.4 18230.6
XVIII. Optical, Photographic,
Cinematographic, Measuring,
Checking, Precision, Medical or
Surgical Instruments and Apparatus; 7.6 3793.5 3785.9 3801.1
Clocks and Watches; Musical
Instruments; Parts and Accessories
Thereof
Total 63.3 103026.5 102963.2 103089.8

Source of data: Ministry of Commerce of the People’s Republic of China

9. Others
With respect to the trade of following two categories, China’s Export was also greater than Pakistan’s. Thus,
the tariff reduction’s influence on welfare would be comparatively limited. The FTA Agreement shall further
standardize the management of the relevant trade and increase the transparency so as to make more benefits for
both sides.

However, the liberalization of service trade sector is usually a difficult point in the negotiation of FTA
Agreement while it would not be so critical to both sides. There are two main reasons: on the one hand, the
opening of service trade sector in China has achieved great progress according to the commitments during
China’s accession to the WTO; on the other hand, there exists great complementarities in service trade between
two countries, so there will be very limited impact with the liberalization on it. Obviously, construction and
contracting of relevant projects are most important field during the development of service trade between two
sides. And there also exists great possibilities on the further cooperation on the transportation of products,
partial commercial service, telecom, tourism and banking between two countries. In the near future, Pakistan
side shall take effective measures to ensure the safety of Chinese personnel and properties in Pakistan.
According to the friendly political relationship, close economic development level and a certain trade
foundation, it’s estimated that the service trade between two countries would be increased while with small
volume in many fields.

In the goods trade sector, as the whole tariff level in China has been greatly decreased after the accession to the
WTO, the tariff reduction in the FTA Agreement between two countries would not bring much negative impact
on China’s domestic manufacturers. On the contrary, as textiles and leather are Pakistan’s main exporting
products to China and a kind of trade division in two countries’ industries has already been formed, the
production costs of Chinese domestic manufacturers in downstream industries would be further lowered with
the China’s tariff’s reduction.

Since the problems existing in the SPS have been solved, China could increase the import of some agricultural
products from Pakistan. And through the promotion of the industries in China, more development space would
be left out for the Pakistan’s relevant industries. With respect to the big trade balance between two countries, it
shall be solved gradually by the means of direct investment to Pakistan.

There exists very good relationship between China and Pakistan and the establishment of FTA would provide a
more stable economic foundation to the political development of two countries. However, signing a package of
agreements consisting of investment both in goods and service trade sectors as well as relevant facilitation
measures shall be considered in order to make a new stage to promote the bilateral economic cooperation
comprehensively.
 Chapter VII Conclusions and Suggestions

I Main Conclusions

1. China’s sustained and rapid economic growth crates conditions for China-Pakistan FTA

Over the years, China has maintained rapid economic growth. China has adopted prudent fiscal and monetary
policies, which ensured economic stability and kept the CPI and unemployment rate at a rational level. China ’s
foreign trade has been growing rapidly. The status of international balance of payment is sound and the
exchange rate of RMB continues to be stable. The booming RTAs around the world and China’s rising
economy have created conditions for China to develop regional economic cooperation. At present, over 20
countries have conveyed the willingness to sign FTAs with China. China has already signed 5 RTAs, and 4
FTAs are currently under negotiation. This background creates unprecedented conditions for China and
Pakistan to build a FTA.

2. Bilateral trade and economic ties between China and Pakistan

China and Pakistan has maintained a long-term stable friendship, which ensures a sustained trade and
economic ties. Pakistan had been China’s largest trading partner in South Asia, but later it became China’s
second largest trading partner in this area because of the sharp increase of China-India bilateral trade.
However, China and Pakistan are complementary in terms of commodity structure and market demand. In
recent years, bilateral trade and mutual investment between China and Pakistan have maintained a rapid
growth rate. The Chinese government attaches great importance to the issue of trade unbalance, and has
adopted measures to import from Pakistan.

China and Pakistan are highly complementary in product structure with a small amount of products competing
to each other. China mainly imports agriculture products and articles thereof, especially textiles and textile
articles with cotton yarn as the main product. As shown in Table 2-2, the main imports include: cotton yarn and
woven fabric of cotton, Terephthalic acid, leather of bovine or equine animals, crude oil, and chromium ores.
Pakistan mainly imports machinery and electronics, textiles, apparel and footwear, vehicles and transportation
equipments and medicine from China.

3. China’s trade and investment regime

Since 1978 when China set opening-up as the fundamental state policy, China has been unswervingly pushing
forward trade and investment liberalization, continuously reducing tariffs and non-tariff barriers, expanding
market access to trade in services, improving investment environment and deepening reform in administrative
regime. Currently, an effective trade and investment policy regime has already been set in China and is being
improved. China’s foreign trade is a liberalized sector but subject to macro regulation. The basic policy is to
maintain an overall balance between imports and exports. In administration of foreign trade, China uses legal
and economic measures with the support of administrative measures on the areas of exchange rate, interest
rate, tariffs and credit facility.

The amendment to the Foreign Trade Law, in particular, materializes the WTO commitments made by China
on the areas of providing consistency and transparency of foreign trade regime, liberalization of foreign trade
right, lowering of market-entry threshold, and protection of intellectual property right, and therefore defines
the legal framework for foreign trade which is needed in the course of China’s integration with the world
economy.

China joined the International Convention on the Simplification and Harmonization of Customs Procedures in
1988. China’s customs procedures are consistent with international practices. China applies SPS measures only
to the extent necessary to protect the life and health of human beings, animals and plants. And China has made
every effort to base its SPS measures on international standards, guidelines and recommendations. In 2002
SAC worked out the target of adopting international standards. By the end of 2005, the ratio of standards
which are international standards based will reach 70% on the whole and 75%—80% in important fields, such
as SPS field. There are designated SPS enquiry points in MOFCOM and AQSIQ.

China’s accession to WTO is a milestone for trade in services. China has issued a series of laws and
regulations on foreign investment in finance, insurance, distribution, telecommunication and professional
services. China has liberalized further the restrictions imposed on the proportion of foreign equity in
investment projects and opened new sectors to foreign investment. The newly–opened sectors include
telecommunications, urban water supply and drainage, construction and operation of gas and heat distribution
network, which all were previously prohibited from any foreign investment.

4. Trade in goods and mutual investment

Since the overall tariff rates have already been adjusted downward after China’s accession to WTO, the tariff
reduction in the FTA will not bring significant negative impact to Chinese producer. On the contrary, a certain
division of labor has been form between China and Pakistan, and the reduction of import tariffs will further cut
the production cost of the lower-stream producer in China. The rapid increase of Pakistan’s leather to China
will probably affect China’s aquatic product market as well as the livelihood and income of the farmers in
distant areas.

When the issue of quarantine and inspection is resolved, China could expand the import of certain agriculture
products from Pakistan. China will also provide more room for Pakistani industries to develop by upgrading
domestic industries. At present, the issue of trade unbalance between the two countries could be gradually
resolved by China’s direct investment in Pakistan. A FTA between China and Pakistan will provide more solid
economic foundation for the bilateral political relations. The free trade agreement should cover trade in goods
and services, direct investment, and trade and investment facilitation so as to promote the bilateral economic
cooperation to a new stage.

5. Trade in services

Generally speaking, the liberalization of trade in services is a hard nut in FTA negotiations, however it’s easier
for China and Pakistan to negotiate on this issue. The reason is: on the one hand, China has honored its
commitment to WTO and made progress in liberalizing trade in service; on the other hand, China and Pakistan
are highly complementary to each other in trade in services, and the probable negative impact brought about by
the liberalization of this field will be limited. Construction and project contracting are the areas with largest
potential for cooperation. There is also further room for cooperation in transportation based on trade in goods,
some commercial services, telecommunications, tourism, and financial sectors. In a word, China and Pakistan
need to tap the potential in the cooperation in service sectors. Sound political relations, close economic
development level and increasing bilateral trade back our confidence that China and Pakistan will see wide-
range, mutually beneficial and lively bilateral trade in services in the future.

II Suggestions

In general, a China-Pakistan FTA will promote bilateral trade in goods and services, investment liberalization
and facilitation. The industrial structure and commodity mix of the two countries are complementary to each
other. A FTA will not have significant negative impacts on China’s industrial development; on the contrary, it
will help China continue to take Pakistan as an important economic platform in South Asia and leverage the
comparative advantages of some industries in China. Based on this study, a FTA will generate more positive
than negative impacts on China’s economy and to build a China-Pakistan FTA is both necessary and feasible. It
is suggested that the Chinese government negotiate with Pakistan on FTA at the right time.

------
Feasibility Study on A China-Pakistan Free
Trade Agreement

(Pakistan)

March 15,2005
CHAPTER 1

OVERVIEW

1.1 Pakistan and China enjoy an enduring, multi-dimensional, deep rooted and all weather
friendship. The longstanding ties of friendship between the two counties are underpinned by
mutual trust and confidence and are based on the principles of UN Charter and respect for each
other sovereignty, territorial integrity and economic well being of the peoples of two countries.
The friendly relations between the two countries have remained unaffected by radical changes
in the international environment and have withstood the vicissitudes of time.

1.2 Pakistan and China both share the ideals of preservation of peace, stability and economic
development in the region for which they have forged a comprehensive partnership in political
and economic fields. A close identity of views and mutuality of interests remain the hallmark of
bilateral ties between the two countries. This deep-rooted friendship between Pakistan and
China is a factor of peace and stability in South Asia.

1.3 In pursuance of the above-mentioned goals and objectives, Pakistan

and China both have decided to launch a Joint Study for the establishment
of FTA between the two countries.
CHAPTER 2

MACROECONOMIC OVERVIEW OF PAKISTAN’S ECONOMY

2.1 Pakistan was one of the few developing countries that had sustained an average
growth of over 5 percent during 1950s to late 1980s. During this era, the economy had
undergone a noticeable process of transformation as trends in sectoral shares of GDP
in terms of agriculture, industry and services clearly bring out the extent of structural
change. Specifically, the share of agriculture sector declined from around 53 percent in
FY50 to 26 percent in FY90, whereas the share of industry rose from 8 percent to 26
percent during the same period. Corresponding to these structural developments, the
poverty also saw a massive reduction of around 22 percentage points to reach 18
percent by end of the 1980s.

2.2 While the above achievements were extremely impressive, these do not bode well
in terms of missed opportunities. Neglected areas like human resource development,
macroeconomic imbalances and shortages in the levels of infrastructure and social
services forced the country in crises like situation in 1990s. Although a wide ranging
institutional reforms were initiated around 1990 with the consultation of international
financial institutions (IFIs), poor economic growth, increasing debt to GDP ratio due to
persistent high fiscal and current account deficits, and increasing poverty remained the
major characteristics of 1990s. These problems were further intensified by economic
sanctions following the nuclear detonation in 1998 and sever drought at that times. As
a result, the country was on the brink of default and international reserves had touched
the lowest level by end of 1999.

2.3 At this critical juncture, the economic managers of Pakistan carefully designed a
comprehensive program of economic reforms in 1999 not only to strengthen the
ongoing reforms but also to take care of the neglected areas. Key elements of these
reforms were the restoration of macroeconomic stability, structural reforms to remove
distortions, instill economic governance, revive key institutions, alleviate poverty through
targeted interventions and social safety nets, and reestablish country’s relationships
with IFIs.

2.4 Thanks to these second round of reforms, Pakistan has made an impressive
economic progress within a short period of five years. Despite being a frontline state in
the war against terrorism, high oil prices, and sever water shortages; economic growth
has been reached over 6 percent, inflation has been contained below 5 percent, fiscal
deficit has been reduced to around 4 percent of GDP, debt ratios have witnessed
significant improvement, exchange rate has been stabilized and international reserves
have reached the all time high level(see Table 1). Furthermore, investment activities are
booming, Pakistan’s creditworthiness has been upgraded and the country has joined
the list of few developing countries that have successfully completed the transitions
from an IMF program to enter in international financial markets. The latest data on
economic indictors suggest that the country is well placed to reach economic growth of
7 percent during FY05:well above the targeted level of 6.6 percent for the years.

Table 1.1: Selected Macroeconomic Indicators

Indicators FY00 FY01 FY02 FY03 FY04P
Growth Rates          
Real GDP (FC) 1
3.9 1.8 3.1 5.1 6.4
Consumer price index (FY01 =100) 3.6 4.4 3.5 3.1 4.6
Exports (f.o.b.) (million US$) 8,569.0 9,202.0 9,135.0 11,160.0 12,313.0
Imports (c.i.f.) (million US$) 10,309.0 10,729.0 10,340.0 12,220.0 15,592.0
Official liquid FE reserves (million US$) 1,352.3 2,075.8 4,804.9 9,993.0 11,107
Income Per Capita (market prices, US$) 526 501 503 582 652
As Percent of GDP
Budgetary deficit 5.4 4.3 4.3 3.8 3.2
Current account balance (including official transfers) -0.3 0.5 4.0 5.1 2.0
Total debt (including explicit liabilities) 88.0 93.4 86.0 79.3 72.3
P
:Provisional :
1
During FY04, sectoral shares in GDP were as follows: agriculture (23.3 percent), industry (24.5 percent) and services (52.2
percent).
2.5 In this backdrop, while few words about real sector will be informative about the
current economic position of economy, a brief review of reforms/developments taking
place in different segments of the economy will help to understand the strengths and
weaknesses of the economy.
Current Status of the Economy

2.6 Pakistan achieved a robust 6.4 percent growth in FY04 which was not only
substantially higher than the 5.1 percent increase recorded in FY03, it was also well
above the 5.3 percent GDP growth target for the year. Interestingly, the acceleration in
aggregate demand during FY04 was mainly driven by investment activities rather than
consumption alone as total real investment grew by 12.4 percent while real
consumption demand grew by 5.5 percent during this period. The impressive growth in
GDP also pushed up the income per capita to US$ 652 by end FY04.

2.7 The broad-based growth of large scale Table 1.2: Key Indicators of real Sector   
  FY00 FY01 FY02 FY03 FY04P
manufacturing (LSM) posted the strongest
Growth Rates
growth recorded in the last three decades. This Real GDP (FC)1 3.9 1.8 3.1 5.1 6.4

remarkable LSM performance is principally Agriculture 6.1 -2.2 0.1 4.1 2.6
Major crops 15.4 -9.9 -2.5 6.9 2.8
driven by accommodative monetary policy, Manufacturing 1.5 9.3 4.5 6.9 13.4
global recovery that fueled export growth, Large-scale 0.0 11.0 3.5 7.2 17.1
Services sector 4.8 3.1 4.8 5.3 5.2
changes in government regulations and rising
As percent of GDP
development spending. The availability of cheap Total investment 17.4 17.2 16.8 16.7 18.1
export finance, rising international demand and National savings 15.8 16.5 18.6 20.6 19.8
P
=Provisional : R =Revised
supportive government policies accounted for
the growth in export-led industries such as textiles, leather, and pharmaceuticals.

2.8 The services sector experienced a growth of 5.2 percent in FY04 compared to 5.3 percent in
FY03 (see Table 1.2). Although FY04 growth in services was slightly lower than FY03, increased
investment in this sector, especially in telecommunications, is encouraging as it is one of the priority
areas of government policies.

2.9 Capital markets performance in terms of dividend payouts, market capitalization,

and initial public offering remained impressive during recent years. The salient feature
of FY04 was sixteen Public Offerings amounting to Rs 55.6 billion. The other positive
outcome was strong growth in corporate earnings; average earning growth in FY04 was
26.5 percent. All these positive developments are captured in the momentum of the
extended 2 year rally, which continued to date, with the benchmark index (the KSE-100)
rising to a new all time high of over 8000.
2.10 The impact of the extended market rally on the KSE market capitalization was
augmented by the additional listings (particularly of OGDC). Specifically, market
capitalization of the KSE rose by an impressive 49.5 percent, increasing its share in
GDP to over 26 percent from 19.7 percent at the end of the preceding year.

Macroeconomic Stability

2.11 Broad ranging reforms initiated in 1999 proved to be a great success in

improving macroeconomic stability in the country. This stability is characterized by a
reduction in budget deficit, turnaround in current account balance of payment from
deficit to surplus, low inflation, stable exchange rate, high international reserves, and
favorable transformation of external debt profile.

2.12 On fiscal front, the government pursued a combination of four set of policy
measures. Firstly, the efforts were made to mobilize additional tax revenues by widen
the tax base, strengthen the tax administration, promote self-assessment, reduce
multiplicity of taxes and effective audit to curb tax evasion and corruption. As a part of
these reforms, a documentation of the economy drive was also launched. Tax rates for
individual and corporate were also rationalized. While the exemption limits of income
tax for individuals were increased keeping in mind the inflation during 1990s, a clear
time table has been following to eliminate segmentation in corporate tax rates. As a
result of these reforms, CBR tax collections witnessed a cumulative annual average
growth of 10.6 percent to reach Rs 518.8 billion by end FY04 from 347.1 billion in FY00.
However, in terms of GDP, rise in both CBR tax collections and total revenue receipts
seems quite modest as new GDP figure has been used (see Figure 1.1).
Figure 1.1: Tre nds Re ve nue Re ce i pts
CBR taxes T otal revenues

16
2.13 Secondly, the government 15
percent of GDP

14
attempted to curtail subsidies to the
13
public sector enterprises and 12
11
corporations. To achieve this end,
10
9
8
FY00 FY01 FY02 FY03 FY04
a number of PSEs were restructured and process of privatization has been
strengthened to handover these corporations/enterprises to the private sector. This will
help to stem a persistent drain on budgetary position of the government: both by limiting
expenditure growth and contributing to the non-tax revenues.

2.14 Thirdly, policy measures to bring a significant decline in debt servicing of the
country. Debt servicing during 1990s emerged as the largest component of the
government expenditures and its share in budgetary outlay reached 34.5 percent by
end FY00. The strategy for this area was to change the profile of external debt and
eliminate debt market segmentation domestically. The former was dome partially
through the support of international financial institutions and the Paris Club bilateral
creditors which significantly eased external payment position that was the binding
constraint to the economy. Specifically, reprofiling of the stock of official bilateral debt,
substituting concessional loans for non-concessional from IFIs, pre-paying expensive
loans and liquidating short term liabilities are the major characteristics of external debt
management strategy.

2.15 On domestic debt, all time low interest rates together with linkage of
administrative profit rates on National Savings Schemes with a market-based newly
introduced Pakistan Investment Bond (PIB) helped government to reduce debt
servicing. As a consequence of these measures, the share of debt servicing in total
expenditures came down to 25.8 percent by end FY04. This decline looks more
impressive as the overall expenditures during the same period saw an annual average
growth of 6.1 percent only. Similarly,
Figure 1.2: Tre nds in e xpe nditure s
decline in total expenditures and debt
T otal Expenditure Debt Servicing Defense
servicing as percent of GDP is also visible
20
(see Figure 1.2).
15
percent of GDP

10

2.16 Fourthly, despite being frontline 5

state in the war against terrorism and

0
FY00 FY01 FY02 FY03 FY04
episodes of high tension with India, efforts were made to contain growth in defense
expenditures without compromising on maintaining a minimum level of deterrence. The
result is also visible from Figure 1.2, as the defense expenditures as percent of GDP
remained approximately unchanged.

2.17 Besides above measures, the National Assembly has passed “The Fiscal
Responsibility and Debt Limitation Bill” to discipline the government budgetary activities
in the future. This bills set clear targets in terms of revenue deficit, debt ratio to be
followed in future.

2.18 On external side, the World Bank Figure 1.3: Trade Activitie s
has categorized trade policy of Pakistan Exports Imports T rade Deficit

16
as one of the least restrictive in South
14
Asia. This policy has gradually provided 12
incentives to exporters to strengthen their 10
billion US $

8
position in existing markets and explore
6
new markets around the globe. This trade 4
2
policy was also facilitated by an exchange
0
rate policy that was focused to avoid FY00 FY01 FY02 FY03 FY04

excessive volatility in foreign exchange

market and at the same time keeping the competitiveness of Pakistani exports intact.
Massive rise in foreign exchange reserves also helped in stabilizing the exchange rate.
As a result of these polices, not only the
Figure 1.4: Pakistan's External counts
exports of the country picked up, the Current account Capital account
Overall balance
imports also surged due to Balancing 5
Modernization and Replacement (BMR) 4
3
activates of the textile sector, leaving 2
trade balance in red (see Figure 1.3). 1
billion US$

0
-1
-2
-3
-4
-5
FY00 FY01 FY02 FY03 FY04
2.19 Another worth noting development on external side is surge in remittances that
reached all time high US Dollar 4.2 billion during FY03. This high level of remittances
not only helped in financing trade deficit and gap in services account, but also turned
current account deficit of balance of payments to surplus (see Figure 1.4). As a
consequence, Pakistan is enjoying favorable position on external front.

2.20 The foreign direct investment

Figure 1.5: Fore ign Di rect Investme nt
recorded a growth of 19.2 percent to 1000
reach US$ 951 million by end FY04 900

(see Figure 1.5). A major portion of the 800

700
million US $
FDI was channeled into
600
telecommunication, financial sector, oil 500
and gas exploration and the petroleum 400

refining sector. The government has 300

FY00 FY01 FY02 FY03 FY04
issued two new licenses in the
telecommunication sector during FY04.

Structural reforms

2.21 To remove distortion stemmed from structural weakness in the economy, tax
and tariff reforms, an aggressive and transparent privatization plan, measures to
deregulate prices and trading in various sectors are the key elements of overall reform
agenda of 1999. Major taxation reforms include the tax survey and documentation drive
to widen the tax net, and a new Income Tax Ordinance 2001 to promote universal self
assessment and uniform tax rates. Furthermore, tax processing mechanism has been
revamped by making extensive use of technology and improving human resource base
of the CBR.

2.22 To comply with the regulations of World Trade Organization, a number of new
laws have been promulgated. Furthermore, maximum tariff rates have been slashed to
25 percent, number of duty slabs have been reduced to four, quantities restriction on
imports (other than few specified areas like security, religious and cultural concerns)
have been dome away.

2.23 In recent years, a number of big public sector enterprises and corporations have
been privatized. Specifically, three major banks along with several key PSEs have
been sold to the private sector. In addition, shares of large companies like Oil and Gas
Development Company (OGDC), Pakistan Petroleum Limited (PPL) have been divested
through public offering. The privatization of two other big companies (Pakistan
Telecommunication Co. Ltd. and Pakistan State Oil) is underway.

2.24 To create competitive market environment and eliminate direct or implicit

subsidies, the government has been implementing polices for the deregulation of prices
and trading in various sector. An automatic price adjustment formula for retail prices of
petroleum products, elimination of price distortions in natural gas, allowing agricultural
prices towards market based pricing, removal of restrictions on the import and export of
agriculture commodities, allowing private sector to wheat procurement and trade, are
some of the key elements of the government’s deregulation polices.

Economic Governance

2.25 The far reaching developments have taken place in the area of economic
governance, as transparency, consistency, rule based decision making are well
underway. Freedom to press and access to information also help in promoting
economic governance.

2.26 Besides above, devolution plan that transfers powers from federal and
provincial governments to local levels and an accountability process to check corruption
are the other important measures to promote governance. As a part of overall
economic governance, separates guidelines have been issued by both the regulators
(State Bank of Pakistan and Securities Exchange Commission of Pakistan) for financial
sector.

2.27 In this backdrop, Pakistan is not only well placed to sustain high growth rate, but
also offering great opportunities to foreign businesses and investors. Stable
macroeconomic environment, least restrictive trade policy in South Asia, high standards
of economic governance, deep-rooted structural reforms, well-developed financial
sector and Pakistan’s location as a regional hub make it an attractive country for
business and investment.
CHAPTER 3

TARIFF STRUCTURE OF PAKISTAN

3.1 During the Uruguay Round all multilateral trade negotiations which culminated in establishment
of World Trade Organization, the Contracting Parties to GATT were required to make a commitment
not to raise their tariffs of various products beyond specified limits. To achieve this objective
countries were required to bound their tariffs i.e. to make a commitment not to increase tariffs
beyond the bound limited. Detailed information regarding these bindings are contained in schedule
XV of GATT. The bound tariff were related to Agricultural products as defined in the WTO Agreement
on Agriculture (first 24 chapters of HS Code excluding fish classified in Chapter-3). The level of
binding was 100%, excluding a few tariff lines, which were bound at 150%.

3.2 In December 2001, after an Agreement with European Union, Pakistan bound its tariff on 831
lines at 6 digit relating to textile and garments sector (Chapters 50-63 of HS Code) at 5-30 percent.
The bindings for certain tariff lines were further reduced on 1 st July 2002 and the maximum binding is
25%.

3.3 The affect of the forestated binding was that upto 2003 out of a total of 6051 tariff lines, 2306
(38.1%) were bound by Pakistan in WTO.

3.4 On 11th June 2003, Pakistan notified to WTO communicating a unilateral binding of tariffs at 55,
60, 70 & 75 percent. The details of these bindings are available in the Revised Schedule XV-
Pakistan, in WTO. Presently only specific rates and MFN tariffs higher than 25%, are not bound in
WTO.

TARIFF RATIONALIZATON
3.5 During 1995 when Pakistan initially bound its tariff in WTO, the applied rates were much higher
than today. During the last decade Pakistan has made a major effort to rationalize and reduce tariff
to remove export bias. This was a major policy shift from import substitution to export-led growth. In
the past decade, simple average tariff rate declined from 51% in 1995 to 17% in 2004. By way of
comparison high income countries reduced tariffs by 3.2% during the Uruguay Round, all low and
middle-income countries by 8.1% and other South Asian GATT members by 16.5%.

3.6 In the case of Pakistan the biggest decline in tariffs came between 1998 and 2001. The world
bank has expressed the view that “what is remarkable is the sustained momentum of tariff
liberalization and the absence of backsliding since the large 1998-2001 liberalization.

3.7 To have a feel of tariff rationalization covering sectors like agriculture, forestry, fishing, mining
and manufacturing industries, the table given below would be of interest. It may be noticed that fish,
forestry and agriculture are also relatively more open that other sectors of the economy with average
tariff rates of 10-15 percent in 2004. This is quite uncommon, in both regional and global contexts:-

Industry 1995 1998 2001 2002 2003 2004

11 Agriculture 36.1 35.4 15.2 14.0 14.0 13.9
12 Forestry and Logging 38.1 36.6 16.9 14.9 14.9 14.9
13 Fishing 66.5 61.9 9.8 9.8 9.8 9.8
21 Coal Mining 31.7 31.7 10.0 10.0 10.0 10.0
22 Crude Petroleum and Natural Gas 60.0 60.0 10.0 6.3 6.3 6.3
Production
23 Metal Ore Mining 15.0 15.0 5.2 5.2 5.2 5.2
29 Other Mining 46.5 46.5 15.8 13.7 13.7 11.7
31 Manufactured Food, Beverages 49.4 47.3 26.8 23.9 23.8 23.8
and Tobacco
32 Textile, Apparel, and Leather 65.4 59.4 26.0 21.6 21.8 21.8
33 Manufactured Wood products 61.5 57.8 25.1 21.4 21.4 21.4
34 Paper, Printing and Publishing 60.8 56.5 21.6 18.6 18.7 18.5
Manufactured Chemicals,
Petroleum,
35 Coal, Rubber, Plastics 44.9 43.1 15.9 14.6 14.6 14.3
Manufactured Non-metallic
36 Minerals (except petroleum) 62.5 58.3 26.1 22.1 22.1 21.6
37 Basic Metal Industries 49.7 47.5 16.5 13.9 13.9 13.6
Manufactured Metal Products,
38 Machinery and Equipment 47.9 41.3 21.1 16.7 16.7 16.4
38 Other Manufacturing 50.7 48.4 21.0 18.9 19.0 18.9
99 Other Industries (excludes HS99) 48.2 46.2 11.4 10.0 10.0 10.0
All Goods 51.0 47.1 20.4 17.3 17.3 17.1

3.8 The decline of average tariff rates for consumer goods, raw material for consumer goods, capital
goods and their raw material is reflected in the following table:

Rationalization of Tariff Structure

(Average Percentage Rates)

Year Consumer Raw material for Raw Material for Capital

Goods Consumer Capital goods Goods
Goods

1994-95 43 32 46 31
1995-96 46 31 48 36
1996-97 23 20 35 28
1997-98 26 18 27 24
1998-99 18 16 25 21
1999-00 19 16 22 22
2000-01 16 16 20 20
2001-02 17 14 17 16
2003-04 15 12 14 16
2004-05 14 11 12 15
 (Jul-Dec)

3.9 An other feature of tariff rationalization is the reduction of number of slabs in tariff. At present
99% of the tariff lines attract tariff, at only 4 slabs of 5, 10, 20 and 25 percent. The number of tariff
lines in different slabs is reflected in the following table:-

Tariff Rate Number of Lines Share of Total Lines

5 1103 18%
10 1669 27%
20 873 14%
25 2361 39%
30-200 65 1%

3.10 Out of more than 6000 tariff lines in the schedule, Pakistan currently levies
specific duties on 43 products, down from just over 100 products with the specific duties
in 1995. These aggregates, however, does not reflect some very large changes over
time in the sectoral coverage of specific tariffs. Earlier, specific tariffs were levied on a
wide range of alcoholic beverages, scrap metals, and synthetic textile inputs which have
been converted into Ad valorem tariffs. The same is true for specific tariffs on a few
isolated tariff lines such as business firms, film and postage stamps. In the latest tariff
schedule, specific tariffs are used for only four products; betal leaves, audible oils,
caustic soda in aqueous solution and lubricant oil. Tariff lines with specific duties now
covered only about 4.5% of total imports of 2001-2002. It may, however, be pointed out
that palm oil account for imports and essentially of all the customs duties collected using
specific tariff while making up only 3.8% of total imports, palm oil contributed 19% of the
total customs duties collected in 2001-2002.

3.11 Pakistan is still continuing with tariff rationalization and in the short term further major reductions
of tariffs would be made. The forestated analysis, however, does not take into account the
preferential tariff arrangements on bilateral and Regional levels. The unilateral reduction of tariffs
during the last 10 years and the sustained further reduction in tariffs has enable various sectors of
the economy to adjust elimination of tariff in bilateral and regional arrangements to remain
competitive international trade.
CHAPTER 4

MARKET ACCESS INITIATIVES OF PAKISTAN -

REGIONAL AND BILATERAL

4.1 Pakistan has played an active role in the multilateral trade negotiations since 1948 and
has bound over 98% of tariff lines in WTO. Pakistan is also playing a leading role in the
current negotiations under Doha Development Agenda. Though it is correct that tariff
reduction under multilateral negotiations would ultimately establish a universal free trade
area and removal of trade barriers in the international trade, after Cancan ministerial, the
importance of bilateral and Regional Preferential Trade Arrangements (PTAs) and Free Trade
Agreements (FTAs) have gained importance. Besides, the experience of ASEAN and
NAFTA, have encouraged other Regions to work out similar Arrangements for the over all
growth of trade.

SAPTA

4.2 The first meaningful initiative in the South Asia was SAARC Preferential Trading
Arrangement (SAPTA) which was signed in April, 2003. SAARC consists of seven countries.
There were certain concessions, which were only available to the LDCs.

4.3 SAPTA was based on a positive list concept and was of limited applications. During the
four Rounds of SAAPTA Pakistan reduced tariff on 435 tariff lines for LDCs and 494 tariff
lines for all countries of SAARC including non-LDCs.

SAFTA

4.4 The leaders of SAARC countries at Colombo Summit in 1998 agreed to establish South
Asia Free Trade Area. The Agreement was negotiated and signed in January 2004, during
Islamabad Summit. Presently the Annexes to the Agreement i.e. Sensitive List; Rules Origin;
Revenue Compensation Mechanism for LDCs and the requirement of technical assistance to
LDCs are being negotiated and the first phase of tariff reduction would begin from 1 st
January, 2006. The Agreement provides for reduction of tariff to 0-5% by 2014.

OTHER REGIONAL ARRANGEMENTS

4.5 Pakistan signed Economic Cooperation Organization Trade Agreement (ECOTA)

under the auspices of Economic Cooperation Organization at Islamabad in July 2003. It has
been agreed that all the member states would reduce tariff to 10% on all traded items in the
Region within a period of 5 years. The negotiations on the modalities including Sensitive
Lists, which would not be subjected to reduction of tariff, is being negotiated.

4.6 On the platform of Organization of Islamic Countries (OIC), a Preferential Trading

System is being negotiated. This Arrangement would be amongst 53 countries and is a very
ambitious project. The negotiations are continuing and presently trade liberalization
programme is under discussion.

4.7 A PTA with D-8 countries which includes Pakistan, Iran, Turkey, Bangladesh,
Egypt, Nigeria, Malaysia and Indonesia is also being negotiated. It is expected that the
Agreement would be ready for signatures by the end of 2005; to be followed by negotiations
on Rules of Origin and exchange of lists for tariff reduction.

BILATERAL NEGOTIATIONS
SRI LANKA

4.8 Free Trade Agreement with Sri Lanka was signed in June, 2002. The Annexes to the
Agreement i.e. lists of Immediate Concessions (Early Harvest Programme); No Concessions;
and Rules of Origin, have been finalized. Diplomatic Notes were exchanged on 9th February
2005, during the visit of the President of Sri Lanka to Pakistan. The process of Ratification
has begun and the FTA would be operationalized within weeks.
IRAN

4.9 PTA with Iran was signed in March, 2004. During the Second Technical Meeting at
Tehran, both sides have agreed on Concession Lists and Rules of Origin. The Agreement is
presently in the process of Ratification by both the countries.

UNITED STATES OF AMERICA

4.10 Pakistan signed a Trade & Investment Framework Agreement (TIFA) with USA in June,
2003. This is an institutional framework for enhancement of bilateral trade and investment.
Presently, Pakistan is negotiating Bilateral Investment Treaty (BIT) with the US. The
negotiations on an FTA would follow in the near future.

OTHER BILATERAL INITIATIVES

4.11 Negotiations with Bangladesh, Nepal, Singapore, Turkey, Indonesia, Malaysia,

Morocco, Laos, Mauritius, Yemen and Tajikistan are beginning for bilateral Preferential
Trade Arrangements. Besides, the possibilities of developing trade linkages with South
American countries, have also been initiated after the visit of the President of Pakistan to
these countries.
CHAPTER 5

PAKISTAN’S TRADE

BRIEF HISTORY:

5. The shift in the paradigm of Pakistan’s Trade Policy is summarized as below:

 1950s—Restrictive Import Regime and over-valued Exchange-rate

 1960s—Import substitution policies and Export Promotion Measures.
 1970s—Gradual liberalization of Trade Regime
 1980s—Export- led growth:
 Reduction of anti export bias
 Reduction of non-tariff barriers
 Maximum tariff reduced from 225% to 125%
 Tariff slabs reduced from 17 to 10%
 Move to flexible exchange rate mechanism
 Rice & cotton export opened to private sector.

 1995-2005—Comprehensive liberalization of Trade regime:

 Extensive trade liberalization program
 Range of export promotion measures.
 Removal of non-tariff barriers.
 Maximum tariff rate reduced from 125% to 25%.
 Number of tariffs slabs reduced.
 Para-tariffs converted into salutatory tariff regime.

5.2 Between 1982 and 2003, global exports increased by 397% to US $ 7.482 trillion. During the
same period, Pakistan’s share in the global exports increased from 0.13% to 0.16%.

COMPOSITION OF EXPORTS:

5.3 Over the years, the composition of Pakistan’s exports has undergone changes as can be
seen from the table below:

Primary
Semi-Manufactures Manufactures
Commodities
(% share) (% share)
(% share)
1984-85 28% 18% 54%
1994-95 11% 25% 64%
2000-05 9% 15% 76%

COMPOSITION OF IMPORTS:

5.4 The composition of imports has also changed as shown below:

Raw-material Consumer goods Capital goods

(% share) (% share) (% share)
1984-85 52% 16% 32%
1994-95 54% 14% 35%
 2003-04 56% 9% 35%

THE EMERGING CHALLENGES:

5.5 Following are some of the challenges that lay ahead for Pakistan’s trade:

 Compliance with WTO agreements.

 Integrated Trade Patterns with global value-chains.
 Trade Blocks especially NAFTA and EU which are our major markets
 Compliance issue—environmental, social, security and labor.
 Buyers Demands.
 Country image.

POLICY THRUSTS:

5.6 To deal with these challenges, a two-pronged export has been developed which is based on two
pillars, namely:

I. Strategy that would directly impact volume & value increase in exports
II. Strategy to provide exporting stakeholders an enabling environment.

I. Strategy that would directly impact volume & value increase in exports : In this, the
Government acts as a strong export promotional facilitator. The export strategy for volume & value
growth is to:
i) Enhance world market shares of core export categories in major markets through
proactive export promotion and buyer driven FDI.

ii) Develop exporters’ capabilities and capacities to compete and improve product range
& quality to achieve sustainable value addition.

iii) Achieve export diversification to reduce future vulnerability by achieving product and
geographic diversification.

iv) Pursue Multilateral Regional and Bilateral market access aggressively.

v) Leverage trade development with OIC countries.
vi) Promote the role of women in trade & business to maximize economic value addition
through human resource development.

vii) Identify next generation product sectors to achieve the desired quantum leap
through:

i. Export oriented FDI

ii. Joint ventures and
iii. Clear plans to strengthen respective supply chain capacity.

II. Strategy to provide exporting stakeholders an enabling environment : For this, the
Government has launched various Trade Policy Initiatives to encourage such an environment. The
strategy to provide a more enabling environment is to:

i) Strengthen export culture.

 ii) Reduction in cost of doing business.
iii) Provision of adequate and efficient infrastructure including roads, sewerage, utilities
and telecommunications.

iv) Tariff rationalization to reduce cost of capital investments.

v) Better quality & standards management to reinforce buyer confidence in ‘Made in
Pakistan’.

vi) Support social, environmental & security compliance.

vii) Business image management of Pakistan to reinforce the suitability and reliability of
Pakistan as a source of products and services.

viii) Support development of export related human resources and skills to provide for
existing export sectors.

ix) Support international confidence in protection of intellectual property rights.

x) Develop the SME sector for exports both as vendors to export industry and also as
exporters themselves.
CHAPTER 6

INVESTMENT

6.1 Pakistan-China economic relations are strong and robust. China has made
valuable contribution to Pakistan’s economic development particularly in the
development of infrastructure and setting up of basic industries. Pakistan and China
are cooperating closely in the development of the Gwadar Port, which would help
economic activity in western regions of Pakistan and provide important access route to
the sea for Afghanistan and Central Asian Republics. A large number of important
projects such as the Karakoram Highway, Thar Coal Mining, up-gradation of Pakistan
Railways and Power Generation Projects are shining examples of this economic
cooperation.

6.2 During the visit of the President of Pakistan to China in November 2003, both
Pakistan and China signed Preferential Trade Agreement to promote economic and
commercial relations between the two countries. We are now moving towards a
comprehensive economic partnership with China including establishment of Joint
Ventures and Free Trade Arrangements. Pakistan has already announced the
establishment of special industrial/export processing zone for the Chinese Investors.

6.3 In order to increase the investment relations between the two countries, the
Government of Pakistan/Board of Investment, in coordination with the Embassy of
Pakistan, China, Embassy of China, Pakistan, China Council for Promotion of
International trade and other business chambers & associations of China, organized two
events in China. The first event was organized at Shanghai, China on October 16,
2003. Around 300 Participants participated in the event. The second event was
organized at Beijing, China on November 4, 2003. The President of Islamic Republic of
Pakistan presided over the meeting. Around 575 people participated in the event.
During this event, Pakistani and Chinese businessmen signed 20 Joint Ventures worth
US $ 250 Million. To give a further boost to Pak-China investment relations, China
Desk has been established in the Board of Investment, Islamabad.
 FDI Inflows and Outflows – China

US $ million
Year 1996 1997 1998 1999 2000 2001 2002 2003

FDI 40,180 44,237 43,751 40,319 40,772 46,846 52,743 53,505

China Inflows

FDI 2,114 2,563 2,634 1,775 916 6,884 2,518 1,800

Outflows

Hong FDI 6,057 11,368 14,766 24,580 61,939 23,775 9,682 13,561
Kong Inflows

FDI 16,960 24,407 16,985 19,358 59,375 11,345 17,463 3,769

Outflows

Source: World Investment Report-UNCTAD 2004.

 CHINA – FOREIGN DIRECT INVESTMENT

 The flow of FDI from China into Pakistan:

(million US $ )

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04

2,453 - 0.075 0.262 2.986 14.304

FDI from China in Pakistan Excluding Hongkong

16000000

14000000

12000000

10000000
US $

8000000 FDI

6000000

4000000

2000000

0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04
Years

Source: State Bank of Pakistan

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The flow of FDI from China and Hong Kong into Pakistan:

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04

1.027 2.570 2.801 3.038 8.618 20.592

(million US $ )

FDI from China In Pakistan Including Hongkong

25000000

20000000

15000000
US $

FDI
10000000

5000000

0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04
Years

Source: State Bank of Pakistan

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Pakistan – China Bilateral Investment Treaty (BIT)

 Signed on February 12, 1989

 Encourages promotion of Bilateral Investment both in

China & Pakistan

 Covers all kinds of investments

 Protects investors & investments of both the countries

against discrimination and expropriation

 Fair and equitable treatment

 Provides dispute resolution mechanism

Investment Policy – Service sector

Service Sector

Activities

  FDI in Service Sector is allowed in any activity subject to condition which require

prior permission from the concerned agencies will continue to get the same

treatment until and unless de-regulated by such agencies and will be subject to

70
 provisions of respective sectoral policies. The list of deregulated services in

Telecommunications (SRO 457(I)/2004 dated 12.06.2004.

Conditions

 The amount of foreign equity investment in the company/project shall be at least

US$ 0.15 Million.

 Foreign investors are allowed to hold 100% of the equity.

 Foreign equity repatriation ceiling of 60% has been enhanced to 100%.

PAKISTAN’S INVESTMENT PACKAGE

Manufacturing Sector
Priority Industries No
Engg+Chem, Agri
V.A. + Business, Housing & Other
Export Hi-Tech & Construction, Tourism Cat Industries
Cat(A) IT Cat(B) (C&D) Agriculture
Govt. Permission Not required ex
Not required except 4 specified industries*
Remittance of
capital, profits,
dividends etc. Allowed
Upper Limit of
Foreign Equity
Allowed 100% 60%
Minimum
Investment
Amount (M$) No 0.3
Customs Duty on
Import of PME 5%** 5%** 5%** 0-25% 0 %***
Tax Relief (IDA, %
of PME Cost) 50%
Royalty & Allowed as per
Technical Fee No restriction for payment of royalty & technical fee. 100,000
- Max Rate 5% o

* Specified Industries:
- Arms & Ammunitions – High Explosives. – Radioactive substances – Security

Printing, Currency and Mint.

71
No new unit for the manufacturing of alcohol, except industrial alcohol.
PME= Plant, Machinery and Equipment IDA = Initial Depreciation Allowance. V.A=

Value Added.
** SRO:455(I)/2004 dated 12.6.2004 *** SRO: 457(I)/2004 dated 12.06.2004.

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PRIORITY SECTORS
– Textile

– Engineering Goods

Textile Machinery (Spinning-Dyeing & Finishing-Weaving)

Assembly

Electronics

Automotives

Agricultural Implements

– IT & Telecom

– Agricultural & Agro based Industry, Cool chains

– Food & Fruit processing and packaging for exports

– Live stock & Dairy Farming

– Oil & Gas

– Mining (Coal, Gems & Jewellery)

– Infrastructure

– Power (Coal, Hydel, Gas)

– Chemicals (Pesticides, Dyes, Molasses Based, Polyester, Mineral Based)

– SMEs/Engineering (Marbles, Minerals, Semi-Precious Gems)

– Leather & Leather goods

------------

73
Feasibility Study on A China-Pakistan Free
Trade Agreement

(Joint Conclusion)

74
 FEASIBILITY STUDY ON A FTA BETWEEN CHINA AND
PAKISTAN

CONCLUSION:
China and Pakistan enjoy an enduring, deep rooted and all weather
friendship. This deep-rooted friendship between the two countries is a
strong basis for a closer economic relations and trade partnership that can
create a win-win situation for both.

China and Pakistan enjoy complementarity in terms of industrial structure

and market demand. In recent years, bilateral trade and mutual investment
between China and Pakistan have maintained a rapid growth rate.
Pakistan has become China’s second largest trading partner in South
Asia, while China has become Pakistan’s fourth largest trading partner in
the world. The joint initiatives of China and Pakistan to negotiate FTA
could help improve the bilateral economic relationship and overcome
limitations that are still present. Both governments attach great
importance to the issue of trade imbalance, and have adopted positive
measures to rectify the situation.

China and Pakistan’s Integration into the World Economy

China’s accession to the WTO has been a milestone for the liberalization
and facilitation of trade and investment. In 2004, the Chinese government
has adjusted its average tariff rate from 11.0% to 10.4% and according to
China’s commitments to the WTO, the average tariff rate will be further
reduced. China’s trading system is getting more tariff-based and
transparent. The adjustment of foreign investment policies has provided
more and better opportunities for the inflow of foreign investments. The
Chinese legal system has also been improved continuously. A series of
laws and regulations including the new Foreign Trade Law have been
enacted to ensure the enforcement of trade and investment policies. With
the deepening of reform and opening-up, China is now taking a more
active part in the trade liberalization at bilateral, regional and multilateral
levels. This will facilitate China and other countries around the world to
reap mutual benefits and realize common development.

Since 2001, Pakistan’s economy has started to develop in a fast track

through adjustment and reform of its economic structure. The national
economy of Pakistan maintains the trend of improving consistently: the
industry is increasing strongly; the government debts keep decreasing; the
foreign exchange reserves have reached all time high; the per income
capita has been raised greatly; poverty has been reduced and foreign trade
is developing steadily. Pakistan takes an active part in the discussion and
decision-making of WTO, carries out its obligation under WTO,

75
promotes its economic reform, and improves the efficiency and
competitiveness of its national economic activities.

76
Effects of FTA on Trade in Goods

Both the Chinese and Pakistani Joint Study Groups agreed that an FTA
between China and Pakistan will further strengthen bilateral economic
and trade relations and will be of strategic importance for both countries.
According to the analysis, if zero tariffs are adopted, positive trade effects
will be significant for both countries. In particular, bilateral trade in
agriculture, aquatic industry, chemical, mineral and metal products will
increase greatly thereby creating a win-win situation for both Pakistan
and China.

In the case of Pakistan’s export, if a FTA is established between the two

sides, the trade creation on the agricultural products, mineral products,
chemical and plastic products, leather products and textile materials will
increase. The effect of a FTA on China’s export to Pakistan will mainly
focus on finished industrial products. China’s export of footwear
products, metal products and machinery and electrical products will
increase. Therefore China and Pakistan could expect a bright prospect of
cooperation in these fields. Taking a long term view, China and Pakistan
have complementarities in aquatic products and Pakistan’s export of
relative products to China will increase.

77
Effects of FTA on Trade in Services and Investment
In China, the liberalization of trade in services is an ongoing process,
with relatively large scale and low development level. The Chinese
service sectors have already attracted many foreign investors. In Pakistan,
the scale of trade in services is relatively limited. By far, the volume of
trade in services between China and Pakistan has been relatively small,
which suggests great potential in the future. China and Pakistan are
highly complementary to each other in trade in services. There is also
further room for cooperation in transportation based on trade in goods,
commercial services, telecommunications, tourism, and financial sectors.
An FTA between China and Pakistan will also promote the development
of bilateral trade in services.

In recent years, China and Pakistan have witnessed steady growth in

mutual investment; however the scale of investment has been relatively
small. The two sides have quite a few areas for investment, which are
also highly complementary to each other. A bilateral FTA will promote
mutual investments between the two countries in the areas where each
side has comparative advantages. With respect to the trade imbalance
between two countries, the issue can be resolved gradually by the signing
of proposed FTA and with China’s direct investment in Pakistan.

78
Conclusion and Suggestions
On the whole, a China-Pakistan FTA will greatly facilitate and promote
bilateral trade in goods, services, and in investment liberalization. Since
the industrial structures of the two countries are highly complementary to
each other, an FTA will not have any major negative impact on domestic
industrial development but may rather help both economies to tap the
comparative advantages in each others’ market.

In conclusion, according to the Joint Study, a China-Pakistan FTA is

feasible, and will have a positive impact on the economies of the two
countries. Negotiations, therefore, on the establishment of a bilateral FTA
are strongly recommended to be carried out between the two sides an
early date.

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