Trade between USA and Pakistan

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Since the last decade, trade liberalization and the quest for global free trade has changed in definition and extent for all nations. The political momentum has shifted away from what was considered by many nations as the scrupulously slow process of multilateral tariff negotiations to smaller regional and bilateral arrangements.

In order to take advantage of the growing integration and cooperation between nations, Pakistan has initiated many trade agreements with various nations, including USA.

Over the last decade, the economic and political ties between USA and Pakistan have undergone their share of change, and Pakistan, in the recent years has actively sought to strengthen bilateral trade with USA, as a necessary and integral part of its development strategy. Pakistan is currently holding talks with USA to sign FTA.

After successfully negotiating Trade and Investment Framework Agreement (TIFA) with USA—a precursor to Free Trade, Pakistan is now pursuing Free Trade Agreement (FTA). The agreement is believed to be of mutual benefit to either nations.

It only requires one to peek into historical data of trade between the two countries, to establish that the USA is the largest trading partner of Pakistan. For a long time the USA has been the main source of wheat, fertilizer, raw cotton, chemical compounds, plant and machinery, aircraft and their parts and iron and steel. Textile products contribute to a large share in Pakistan’s exports to the USA and it is estimated that a much bigger market exists for the export of higher value added textile products to the USA.

While the FTA will allow USA to increase access to Pakistani market which it can leverage to improve life of common man; the FTA will allow Pakistan to become competitive with USA with respect to textile export. Currently, Pakistan’s exports to USA vary from $3.7 billion to $4 billion, making it our biggest trading partner. USA is the single largest export market for Pakistan, accounting for almost 16% of the total exports of Pakistan. With signing of the Free Trade Agreement (FTA) Pakistan is estimated to be able to increase its level of exports to more than $6 billion. However, for this to happen, Pakistan requires not just greater access to US market but also some transfer of technology. In other words, Pakistan under FTA is also negotiating to increase the scope of GSP scheme of its textile products; enabling the country to increase its exports to USA.

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 As per Pakistan Textile Association, 30% and 58% of Pakistan’s total woven garments are exported to USA and EU-27 respectively. Compared to this, 63% of knit garments are exported to USA and 29% to the EU-27. In total, the EU and the USA constitute 91% of Pakistan’s total garment exports.

Pakistan’s exports of woven garments to EU and USA

Importers

Exported value in 2008

Exported value in 2009

Exported value in 2010

Total Exports to World

                                           1,361,171

                                        1,206,499

                                         1,461,643

United States of America

                                           470,904

                                            386,189

                                           435,268

EU-27

                                           729,398

                                           668,475

                                           859,684

All figures in USD 000

Pakistan’s exports of knit garments to EU and USA

Importers

Exported value in 2008

Exported value in 2009

Exported value in 2010

Total Exports to World

                                        1,888,467

                                        1,680,773

                                        1,982,423

United States of America

                                         1,166,899

                                        1,038,702

                                        1,238,550

EU-27

                                           569,690

                                           497,859

                                           580,854

All figures in USD 000

 

Likewise, Pakistan offers an attractive investment opportunity for USA. Pakistan offers a large market of 180 million people, plus access to the landlocked Central Asian countries. Moreover, the quality of Pakistan textile is far better and prices much cheaper than other competing nations. With efficient technology transfer, a free trade agreement with the US, alongside GSP Plus status by the EU would make Pakistan a focus country for investment Pakistan offers immense profit potential for USA businessman. Assistance of USA in the energy sector has already led to addition of over 1,000 megawatts of power to Pakistan’s national grid. Moreover, the Overseas Private Investment Corpo­ration of the US government is also considering investing into up to 300 MW of wind power generation projects. Furthermore, USA is also planning to invest $15 million to support the Central Asia-South Asia electricity transmission project (CASA-1000), thus helping Pakistan to improve energy connectivity and up-gradation of transmission infrastructure.

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Moreover, Pakistan and USA trade can grow further if FTA is signed. Pakistan can have access to USA market, especially for fruit and vegetable markets while USA can greatly benefit from the growing package food industry in Pakistan. Low tariffs in machinery and chemicals can also benefit USA manufacturing companies. Most importantly, US-Pak FTA will form the basis for South Asian Free Trade Agreement (SAFTA). If SAFTA is signed it will allow US investors access to regional trade. 

Although the joint statement by the two countries has reassured of the commitment to expand bilateral trade and business ties, there is no concrete framework. Many USA critics point towards, Pakistan’s inability to curb corruption as well as poor environmental and labor practices as reasons for not signing FTA. In my opinion the proposed FTA provides a platform for building on the reform stream in Pakistan. That is to say, investing in projects with social as well as economic benefits.

Many of the opponents of the free trade agreement are also concerned that low barriers might hurt some producers especially if they are accustomed to high tariffs. However, one may argue that long phase-out periods should be put in place so that firms accustomed to high protection can get use to low barriers. Furthermore, detailed Labor and environmental standards should be stated by both countries which in all case should be complied. Reducing bi-lateral Income tax can also aid increasing FDI. 

References:

PRGMEA.org http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CCsQFjAA&url=http%3A%2F%2Fwww.prgmea.org%2Fpdf%2F33703.doc&ei=u5AeU_6mKOTq0wGKwoHoAw&usg=AFQjCNH59kzWzdzpPdsnYSiRyzehjTmTlg&sig2=rocrlBqNTNcI7bWChGPs6A&bvm=bv.62788935,d.dmQ

Strategic Dialogue and Tactical Effects, http://www.nation.com.pk/columns/03-Feb-2014/strategic-dialogue-and-tactical-effects

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