China and pakistan Everlasting Friendship Economic Comparison

1. China / Pakistan: Everlasting Friendship
1. A BRIEF ECONOMIC COMPARISON:
Pakistan:
Overview:
Decades ofinternal political disputes and low levels offoreign investmenthave led to slow growth and
underdevelopmentin Pakistan. Agriculture accounts for more than one-fifth of output and two-fifths of
employment. Textiles accountfor mostof Pakistan's exportearnings. Over the pastfew years, low
growth and high inflation, led by a spurtin food prices, have increased the amountofpoverty. As a
result ofpolitical and economic instability, the Pakistani rupee has depreciated more than 40% since
2007.
The governmentagreed to an International Monetary Fund Standby Arrangement in November 2008 in
response to a balance ofpayments crisis. Although the economy has stabilized since the crisis, ithas
failed to recover. Foreign investmenthas not returned, due to investor concerns related to governance,
energy, security, and a slow-down in the global economy.
Pakistan remains stuck in a low-income, low-growth trap, with growth averaging about3.5% per year
from 2008 to 2013.
Suggestion:
Pakistan must address long standing issues related to governmentrevenues and energy production in
order to spur the amount of economic growth that will be necessary to employ its growing and rapidly
urbanizing population, more than half ofwhich is under 22. Other long term challenges include
expanding investmentin education and healthcare, adapting to the effects ofclimate change and
natural disasters, and reducing dependence on foreign donors.

2. China:
Overview:
Since the late 1970s China has moved from a closed, centrally planned system to a more market-
oriented one that plays a major global role - in 2010 China became the world's largestexporter.
Reforms began with the phasing out ofcollectivized agriculture, and expanded to include the gradual
liberalization ofprices, fiscal decentralization, increased autonomy for state enterprises, growth ofthe
private sector, developmentofstock markets and a modern banking system, and opening to foreign
trade and investment. After keeping its currency tightly linked to the US dollar for years, in July 2005
China moved to an exchange rate system that references a basketofcurrencies.
The restructuring ofthe economy and resulting efficiency gains have contributed to a more than tenfold
increase in GDP since 1978. China in 2013 stood as the second-largesteconomy in the world after the
US, having surpassed Japan in 2001. Still, per capita income is below the world average.
The Chinese governmentfaces numerous economic challenges,including:(a) reducing its high
domestic savings rate and correspondingly low domestic consumption; (b) facilitating higher-wage job
opportunities for the aspiring middle class,including rural migrants and increasing numbers ofcollege
graduates; (c) reducing corruption and other economic crimes; and (d) containing environmental
damage and social strife related to the economy's rapid transformation.
Several factors are converging to slow China's growth, including debtoverhang from its credit-fueled
stimulus program, industrial overcapacity, inefficientallocation ofcapital by state-owned banks, and the
slow recovery ofChina's trading partners.
Suggestion:
The Chinese governmentshould seek to add energy production capacity from sources other than coal
and oil, focusing on nuclear and alternative energy developmentas the largestpopulated country ofthe
world can experience an energy crises in future.

3. Indicator Pakistan China
Exchange rates Pakistani rupees (PKR) per US
dollar - 100.4 (2013)
Renminbi yuan (RMB) per US
dollar - 6.2 (2013)
Fiscal year 1 July - 30 June calendar year
GDP - purchasing power parity
$574.1 billion (2013) $13.39 trillion (2013)
GDP - real growth rate 3.6% (2013) 7.7% (2013)
GDP - per capita $3,100 (2013) $9,800 (2013)
Population below poverty line
22.3% (FY05/06) 6.1%
Inflation rate 7.7% (2013) 2.6% (2013)
Unemploymentrate 6.6% (2013) 4.1% (2013)
Budgetrevenues $29.71 billion $2.118 trillion
Industrial production growth rate
3.5% (2013) 7.6% (2013)
Exports $25.05 billion (2013) $2.21 trillion (2013)
Imports $39.27 billion (2013) $1.95 trillion (2013)
Reserves offoreign exchange
and gold
$11.18 billion (31 December
2013)
$3.821 trillion (31 December
2013
Stock ofdirectforeign
investment - at home
$24.33 billion (31 December
2013)
$1.344 trillion (31 December
2012)
Stock ofdirectforeign
investment - abroad
$1.569 billion (31 December
2013)
$541 billion (31 December 2013)
Budgetsurplus (+) or deficit(-) -7.7% of GDP (2013) -2.1% of GDP (2013)
GDP - composition, by end use Household consumption: 81%
Government
consumption: 10.8%
Investment in fixed
Capital: 12.6%
Investment in Inventories: 1.6%
Exports ofgoods and
Services: 12.7%
Imports of goods and Services: -
18.8%
(2013)
household consumption: 36.3%
government
consumption: 13.7%
investmentin fixed capital: 46%
investmentin inventories: 1.2%
exports ofgoods and
services: 25.1%
imports ofgoods and services: -
22.2%
(2013
Gross national saving 12.7% ofGDP (2013) 50% of GDP (2013)

4. 2. Pak-china trade:
Overland trade ties between Pakistan and China were established in 1979, following the completion of
the all-weather Karakoram Highway. Pakistan’s economic interdependence with China has grown
rapidly in the last decade—in 2010, the latter was Pakistan’s second largestsource ofimports and its
fourth largestmarket for exports. Pakistan’s exports to China grew rapidly throughout the decade, with
growth accelerating sharply following the signing ofa free trade agreement(FTA) in 2006. The average
annual exportgrowth increased from 19 percentbetween 2003 and 2006 to 26 percentfrom 2007 to
2010. As a result, China’s share in Pakistan’s exports almostdoubled in justthree years.
Pakistan’s exports to China (USD million):
2000 2003 2005 2007 2010
Value %share Value %share Value %share Value %share Value %share
244.6 2.7 259.6 2.2 435.7 2.7 613.8 3.4 1435.9 6.7
Even though aggregate exports to China have increased rapidly,one needs to look atthe structure of
exports to fully understand the dynamics ofthis change. A review ofthe structure ofexports reveals
that the exportstructure in 2010 is not encouraging, with raw materials and primary manufactures such
as cotton fiber, chromium ores, and cotton yarn accounting for almosttwo thirds of total exports.

5. Structure of Pakistan’s exports to China, 2000–2010:
2000 2010
No Commodity USD million % share USD
million
% share
1, Cotton yarn, excl. thread 100 40.9 773.3 51.3
2. Chromium ores and concentrates 4.5 1.8 137.6 9.6
3. Cotton fabrics, woven 56.5 23.1 99.6 6.9
4. Textile fibers: cotton 10.7 4.4 75.9 5.3
5. Fish, crustaceans, mollusks 15.3 6.3 67.5 4.7
6. Leather 15.9 6.5 46.0 3.2
7. Machinery and transport 0.8 0.3 45.4 3.2
8. Plastics in primary form 2.5 1.0 38.2 2.7
Subtotal 206.2 84.3 1,247.5 86.9
Total exports to China 244.6 1,435.9
Economic trade between Pakistan and China is increasing at a rapid pace and a free trade agreement
has recently been signed. Currenttrade between both countries is at $9 billion, making China the
second largesttrade partner ofPakistan.
Pak-china economic coridore:
Pak-China Economic Corridor is under construction. It will connect Pakistan with China and the Central
Asian countries with highway connecting Kashgar to Khunjrab and Gwadar. Gwadar port in southern

6. Pakistan will serve as the trade nerve center for China, as mostof its trade especially thatof oil will be
done through the port, which is already controlled by Beijing.
Trade volume due to agreementbetween the two states was $13 billion in 2013, while is expected to
reach $15 billion by 2015. China had been contributing significantly to Pakistan’s imports even before
the ‘’Free Trade Agreement’’ was signed and has seen considerable improvementin its ranking after
the FTA was implemented in 2007. By 2012, it was the source for 15% of Pakistan’s overall imports
from the world as compared to 9.8% in 2006.
3. Benefits and constraints ofPak-China trade:
Pakistan needsto shift from exportingprimarycommoditiesandsimplemanufacturestohigher-value-added
products,if export growthis to be sustainedandexports areto contributetoexpandingemploymentandGDPin
the country.
TheFTAwithChina shouldgive Pakistanan edgeover other countriesina numberofpotentiallyhigh-growth
productsas it provides marketaccessatzero duty for cottonfabrics, bed-linenandotherhometextiles,leather
articles,sports goods,and fruits and vegetablesamongothergoods(Pakistan, Ministryof TextileIndustry,
2008).However, inalmostall theseproducts,Pakistaniexporters have failedto makeheadwaybecauseof
nontariff barriers.For example,Pakistanisa majorexporterof towelsand bed-linentothe US andEurope, but
exports of these productsto Chinaarenegligible.
Pakistan needsto focuson having these nontariff barriersremovedin areasthat areits exportstrengths, such
as cottonfabrics,bed-linen,towels,and sports goods.
Besides exports, investmentfrom China could provide a major boostto Pakistan’s exportindustry.
According to Eichengreen, Rhee, and Tong (2007), the structure of China’s exports has been changing
over the years—from “clothing, footwear, other light manufactures and fuels that dominated its trade in
the 1980s and early 1990s, toward office machinery, telecommunications, furniture, and industrial
supplies in the late 1990s and automated data processing equipmentand consumer electronics in
recentyears”.
In other words, China has been moving up the value chain, butbecause ofits huge labor force, it has
continued to exportlabor-intensive products as well. However, after almost30 years of rapid growth,
mostof the surplus labor has now been absorbed and wages are rising rapidly,particularly in the
coastal belt. As a result, exporters in China are losing competitiveness in the more labor-intensive
industries and beginning to look atthe possibility ofrelocating these industries elsewhere.

7. In Asia, this has happened many times before, i.e., as wages rose in one country, its exportindustry
tended to move to manufacturing more sophisticated products athome and relocated the labor-
intensive productprocesses to neighboring countries. This started with industry relocating from Japan
to Korea, Taiwan, Singapore, and Hong Kong in the 1960s and 1970s, then to Thailand, Malaysia, and
Indonesia in the 1980s and to China and Vietnam in the 1990s and 2000s. This process has often been
referred to as “the flying geese modelofAsian economic development,” with Japan in the forefront.
Owing to China’s huge labor force, ithas taken much longer for this process to start, but it is beginning
to happen, with industries being relocated to Vietnam, Laos, and Cambodia.
According to the World Investment Report 2011, “A new round ofindustrial restructuring and upgrading
is taking place in China, and some low-end, export-oriented manufacturing activities have been shifting
from coastal China to low income countries in South-East Asia and also Africa” (United Nations
Conference on Trade and Development, 2011. However, the SoutheastAsian countries do nothave
enough population to absorb a significantportion ofthe labour-intensive industry relocating from China
once the process starts in earnest. South Asia, because ofits large population, should be the main
recipientofthis industry and Pakistan should aim to be the leader in this regard.
This is a window of opportunity for Pakistan, which has a large textile sector as well as strong clusters
in sports goods, surgical instruments, and light engineering. Ittherefore needs to develop a strategy to
attract Chinese investmentin these areas. Thus far, Pakistan’s approach has been the traditional one,
i.e., trying to attract investmentfrom China in import-substituting industry by providing incentives,
including special industrial zones, and corporate income tax and importduty concessions for the
manufacture ofconsumer durables, such as televisions, refrigerators, air conditioners,washing
machines, etc. This strategy has failed in the pastand it is unlikely to do much better this time since it
will only attract investmentfor assembly plants producing for the domestic market.
Pakistan’s strategy should aim to attract Chinese investment into exportindustries, particularly those
labour-intensive industries that are likely to be relocating outofChina in the next10 years and that are
also Pakistan’s strengths, such as garments, textiles, leather and footwear, surgical goods, cutlery, and
sports goods. The strategy needs to be developed in partnership with larger exporters and the
representatives ofexportassociations in these industries. Once such a strategy is developed,the
governmentshould leverage its long-standing relationship with the Chinese governmentto garner the
latter’s supportin implementing the key elements ofthe strategy.
In addition, Pakistan should seize the opportunity provided by China’s drive to accelerate development
in its western provinces. The Karakoram Highway provides the shortestoverland route to the sea for
these provinces, and China has indicated an interest in upgrading the highway to handle heavy traffic. If
Pakistan were to prioritize this projectand control the movementofIslamic militants crossing over into

8. China, the resulting transit trade through Pakistan could provide a tremendous boostto economic
activity. It would attract Chinese investmentinto the northern regions ofPakistan and create
opportunities for the exportofPakistani products to western China.
Any discussion on Pakistan’s economic relations with China would be incomplete withoutat least a brief
look atthe importside. Pakistan’s imports from China have grown dramatically from aboutUSD 0.55
billion in 2000 to USD 5.25 billion in 2010. China’s share in Pakistan’s total imports has increased from
less than 5 percentto over 14 percentduring this period. This is not surprising since China’s exports to
the restof the world have also grown rapidly, butbecause ofPakistan’s security dependence on China,
the governmenttends to turn a blind eye to violations on imports from the latter. This has provided an
opportunity for collusion between unscrupulous Pakistani importers and Chinese exporters to
misclassify imports from China and understate their value to evade importduties and taxes. As a result,
the actual increase in imports has been even greater than that indicated by official figures.
Although there is no way to estimate the full extentof tax evasion, one can geta rough idea ofthe
undervaluation by comparing the value of“imports from China” reported by Pakistan and “exports to
Pakistan” reported by China in the UN Comrade dataset. Exports reported by China exceeded imports
reported by Pakistan by 32 percentin 2010 (Table 5). The underreporting is probably even greater
since exports are reported on a free-on-board (f.o.b.) basis and imports on a cost-insurance-and-freight
(c.i.f.) basis, and the costof“insurance and freight” is generally between 10 and 20 percentofthe
importvalue (see World Bank, n.d.). Even with a conservative 10 percentadjustmentfor insurance and
freight, the underreporting comes to 45 percent. Thus, actual imports from China in 2010 were in the
range of USD 7 billion to 8 billion.
The problem is notonly the loss in governmentrevenue, butalso the impactofthis “unfair” competition
on domestic industry. The rapid growth in imports from China has decimated a number ofindustries in
Pakistan; generally, these have been industries thatwere dominated by small to medium firms
producing for the local market. This was not because the imported products were ofbetter quality—
based on anecdotal evidence and personal experience, they are in many cases ofvery poor quality and
often imitations of established local brands—butbecause they were extremely cheap due to the
evasion oftaxes and importduties. Small local producers were unable to compete with these products
because the effective tariff (including sales tax) on the final productimported from China is, in many
cases, substantially lower than the effective tariff on the raw materials used by small manufacturers in
Pakistan. Small producers have to buy raw materials from commercial importers, who have to pay the
statutory rates ofduties and a 16 percentsales tax on the duty-paid value ofimports because they are
not eligible for the concessions thatlarge manufacturers enjoy under Pakistan’s notorious Statutory
Regulatory Order regime.

9. 4. Pak-china cultural exchange scenario:
The cultural exchanges between China and Pakistan have undergone a long history. It started more
than two thousand years ago. Shortly after the founding of New China in 1949, the two countries began
their diplomatic ties and have ever since maintained close and friendly cooperative relations in various
fields like politics,economy as well as culture.
The governments ofthe two countries signed The Cultural Cooperation Agreement
betweenPakistan and China on March 25, 1965, when the first executive programme for the Agreement
was also signed. The two countries resumed the signing and implementation ofthe two-year executive
programme in 1979, and since 1997, the two-year executive programme has been ever changed into
three-year programme. The latest one was signed in Beijing in 2003 which covers the years between
2004 to 2006. A large number of delegations have been used to sentacross the border to promote the
cultural activities of both countries.
Apart from that, the two countries have also carried out a number offruitful exchanges and cooperation
in art, literature, education, information, sports, youth affairs, cultural relics, archives, publications,
health and women affairs etc. In the pasthalf a decade, Chinese arttroupes visited Pakistan many
times including folk song and dance troupe, traditional instrumental music troupe and acrobatic troupe
etc. and exchanges also took place in the areas like painting, handicrafts as well as puppetshow etc.
In literature, quite a few writings from both sides have been translated into each other's language
throughout the years. In TV and film, a special agreementwas signed by the two governments in order
to promote the cooperation in this field, and in mid 1980s several TV programs were jointly produced by
two countries' TV channels including Affection on the Highway which captured the fondness from the
people ofboth countries.
China-Pak educational exchanges and cooperation have developed a lottoo over the pastyears.
Now China annually offers 65 person scholarships to Pakistan while Pakistan annually offers 6
scholarships to China. From the year 2003, Pakistan Higher Education Commission started a special
projectwhere qualified students would be selected to explore their doctor's degree in China on
government-financed basis. So far 72 students have been sentunder this project. Apartfrom the
above, annually around 500 self-financed students in Pakistan now go to China for study of medicine,
electronics and engineering technology etc, and the Chinese students who come to Pakistan for self-
financed study are also in a big number every year.