PRC-Pakistan Economic Cooperation in a Comparative Developing Asian Context

PRC-Pakistan Economic Cooperation in a Comparative Developing Asian Context Fahad Khan Economist Regional Cooperation and Integration Division Economic Research and Regional Cooperation Department Asian Development Bank Punjab Economic Forum 04 April 2017 Pakistan

Outline Overview Regional Cooperation and Integration PRC s Structural Transformation PRC-Pakistan Trade and Investment Linkages PRC-Pakistan Trade Policy Overview Infrastructure Needs in Asia OBOR & CPEC in a comparative context Policy Implications and Key Messages 2

Overview of Regional Cooperation and Integration 3

Asia s Integration Trends at a Glance (intraregional shares as % of total) FDI = foreign direct investment. a Migration data in 2000. b Remittance data is only available starting in 2010. Note: Migration data available every 5 years. Trade is intraregional share out of Asia s total trade. FDI is intraregional share out of total FDI inflows into Asia. Equity and debt are intraregional share out of Asia s total asset. Migration is intraregional share out of Asia s total outbound stock. Remittances are intraregional share out of total remittance inflows into Asia. Source: ADB calculations using data from Association of Southeast Asian Nations (ASEAN) Secretariat, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, World Bank, and national sources. 4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Trade growth slowing down Weak global economic recovery compounded by more inward looking trade policies in developed countries. Slower growth of global value chains (GVCs) PRC s growth moderation and structural transformation 25 20 15 10 5 0-5 -10 Trade and GDP Growth (%): Asia Total trade volume growth GDP growth PRC and Asia ex-prc Trade Volume Growth (%) 50 40 30 20 10 0-10 -20 PRC share in Asia's total trade (volume) Asia ex-prc PRC 5

PRC s Structural Transformation 6

PRC s growth rebalancing continues Supply-side contributions to growth (% points) Demand-side contributions to growth (% points) Source: National Bureau of Statistics. Source: National Bureau of Statistics. 7

Outward GVC-FDI from the PRC AUS = Australia; BAN = Bangladesh; BRU = Brunei Darussalam; CAM = Cambodia; GEO = Georgia; HKG = Hong Kong, China; IND = India; INO = Indonesia; JPN = Japan; KOR = Republic of Korea; MAL = Malaysia; NEP = Nepal; PAK = Pakistan; PHI = Philippines; PRC = People s Republic of China; SIN = Singapore; SRI = Sri Lanka; TAP = Taipei,China; THA = Thailand; US = United States; UZB = Uzbekistan; VIE = Viet Nam; GVC = global value chain; FDI = foreign direct investment. Notes: Number of affiliates, in each country, as a share of the total number of affiliates belonging to global ultimate headquarters from each of the selected countries. Source: ADB. 2016. Asian Economic Integration Report 2016: What Drives Foreign Direct Investment in Asia and the Pacific? Manila. 8

Determinants of GVC FDI: Country Characteristics Dependent variable: D(exports>0 & imports >0) (1) (2) (3) (4) Log affiliate sales 0.038*** 0.036*** 0.037*** 0.044*** Log capital-labor ratio -0.495*** -0.173* -0.777*** -1.056*** Private credit 0.227*** Trade restrictiveness index -3.446*** Export upstreamness -0.548*** *** significant at 1%, ** significant at 5%, * significant at 10%. FDI = foreign direct investment, GVC = global value chain. Note: The dependent variable is a dummy variable equal to 1 if the affiliate firms report export and import activity. Capital-labor ratio indicates capital intensity with respect to labor, of the industry where the affiliate firm belongs to. The variable private credit refers to country-level private credit as share of GDP. The variable export upstreamness is a measure of the position the host economy occupies in the production process (natural resource extraction being the most upstream and the final assembly of export products most downstream), derived from Antras et al. (2012). Trade restrictiveness index is from the World Bank.

Special Economic Zones and GVC-FDI PRC = People s Republic of China, FDI = foreign direct investment, GVC = global value chain, km2 = square kilometer, SEZ = special economic zones. Notes: The number of SEZs is for 2014. GVC FDI refers to the fraction of foreign affiliates in the economy that exports. Source: ADB. 2016. Asian Economic Integration Report 2016: What Drives Foreign Direct Investment in Asia and the Pacific? Manila. 10

PRC-Pakistan Trade and Investment Linkages 11

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Share to total USD million GVC-linkages: Pakistan exports to PRC, by commodity group 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3,000 2,500 2,000 1,500 1,000 500 0 Consumption: Primary Intermediate: Primary Capital Total Exports Note: Based on Broad Economic Categories. Source: ADB calculations using United Nations Commodity Trade Database Consumption: Processed & Others Intermediate: Processed & Others Others

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Share to total USD million GV-linkages: Pakistan imports from PRC, by commodity group 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 12,000 10,000 8,000 6,000 4,000 2,000 0 Consumption: Primary Intermediate: Primary Capital Total Imports Note: Based on Broad Economic Categories. Source: ADB calculations using United Nations Commodity Trade Database Consumption: Processed & Others Intermediate: Processed & Others Others

7 6 5 4 3 2 1 0 FDI Inflows (% of GDP) Pakistan China, PRC ASEAN Developing Asia South Asia (ex-pakistan) Source: ADB calculations using data from ASEAN secretariat; CEIC; Eurostat; United Nations Conference on Trade and Development; and IMF World Economic Outlook Database.

Share to Total Total Inflows to Pakistan in US$ million Pakistan s inward FDI by source: PRC and ROW 100% 6000 80% 5000 60% 4000 40% 3000 20% 2000 0% 1000-20% 0 Rest of the World PRC Total inflows to Pakistan

Institutional quality matters for FDI Greenfield investment Cross-border M&A Source High-income Emerging High-income Emerging Host Developing Highincome Highincome Developing Highincome Developing Highincome Developing Overall WGI- host 0.032*** 0.048*** 0.028** 0.020*** 0.050*** 0.074*** 0.046*** 0.040*** Regulatory quality 0.042*** 0.046*** 0.039*** 0.020*** 0.060*** 0.068*** 0.061*** 0.040*** Government effectiveness 0.031*** 0.039*** 0.029*** 0.005 0.037*** 0.051*** 0.035*** 0.018** *** significant at 1%, ** significant at 5%, * significant at 10%. WGI = World Governance Index, M&A = merger and acquisition. Note: Usual gravity model variables (GDP, distance, contiguity, common language) and macroeconomic variables are included but not shown for brevity. Gravity model is estimated using Poisson pseudo maximum likelihood estimation. 16

Top business environment obstacles for firms in Pakistan (2013, domestic vs. foreign firms) Domestic Foreign Electricity Corruption Political instability Tax administration Crime, theft and disorder Tax rates Inadequately educated workforce Customs and trade regulations Access to finance Transportation Practices of the informal sector Access to land Labor regulations Courts Business licensing and permits 0 5 10 15 20 25 30 35 40 45 50 Percent of Firms Source: World Bank Enterprise Survey, accessed March 2017.

Economy Doing Business 2017 Ease of Doing Business Rank (Global) Trading Across Borders 2012 2017 2012 2017 Bangladesh 159 176 136 173 Bhutan 105 73 160 26 India 134 130 114 143 Maldives 56 135 129 147 Myanmar 179 170 133 159 Nepal 100 107 161 69 Pakistan 131 144 104 172 Sri Lanka 125 110 85 90 Note: Data for Myanmar is 2013. Source: Doing Business, World Bank. 18

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Share to total USD billion Pakistan s imports by source 100% 90% 80% 70% 70 60 50 60% 50% 40% 40 30 30% 20 20% 10% 10 0% 0 ROW PRC ASEAN United Arab Emirates Saudi Arabia Total Imports PRC = People's Republic of China, ROW = rest of the world. Source: ADB calculations using Direction of Trade Statistics, IMF

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Share to total USD billion Pakistan s exports by destination 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 30 25 20 15 10 5 0% 0 ROW PRC United States United Arab Emirates euro area Total Exports PRC = People's Republic of China, ROW = rest of the world. Source: ADB calculations using Direction of Trade Statistics, IMF

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Share to total USD trillion 100% 90% PRC s imports by source 2.0 1.8 80% 1.6 70% 1.4 60% 1.2 50% 1.0 40% 0.8 30% 0.6 20% 0.4 10% 0.2 0% 0.0 United States Taipei, China Euro Area (WEO) ASEAN Japan Pakistan ROW Total Imports PRC = People's Republic of China, ROW = rest of the world. ASEAN includes Brunei Darussalam, Cambodia, Indonesia, the Lao People s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam. Source: ADB calculations using Direction of Trade Statistics, IMF

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Share to total USD trillion 100% PRC s exports by destination 2.5 90% 80% 2.0 70% 60% 1.5 50% 40% 1.0 30% 20% 0.5 10% 0% 0.0 United States Hong Kong, China Euro Area (WEO) ASEAN Japan Pakistan ROW Total Exports PRC = People's Republic of China, ROW = rest of the world. ASEAN includes Brunei Darussalam, Cambodia, Indonesia, the Lao People s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam. Source: ADB calculations using Direction of Trade Statistics, IMF

PRC-Pakistan Trade Policy Overview 23

Number of Proposed and Signed FTAs in Asia FTA = free trade agreement. Notes: Includes bilateral and plurilateral FTAs with at least one of ADB s 48 regional members as signatory. The year 2016 covers FTAs that came into effect from January to July, and FTAs that are expected to come into force within the year based on official statements. Signed includes FTAs that are signed but not yet in effect, and signed and in effect. Proposed includes FTAs that are (i) proposed (the parties consider an FTA, governments or ministries issue a joint statement on the FTA s desirability, or establish a joint study group and joint task force to conduct feasibility studies); (ii) framework agreement signed and under negotiation (the parties, through ministries, negotiate the contents of a framework agreement that serves as a framework for future negotiations); and (iii) under negotiation (the parties, through ministries, declare the official launch of negotiations, or start the first round of negotiations). Source: Source: ADB. 2016. Asian Economic Integration Report 2016: What Drives Foreign Direct Investment in Asia and the Pacific? Manila. 24

PRC s Trade Policy Regime Continue liberalizing its trade and investment regime to reshape its economy o PRC President Xi Jinping reiterated the importance of free trade in his speech at the World Economic Forum in Davos, Switzerland on 17 January 2017 othe PRC-driven Regional Comprehensive Economic Partnership (RECEP) may define the global trade architecture of the 21st century Promote "Going Abroad Policy Belt and Road Initiative

PRC s Trade Policy Trade agreements in effect (15): PRC-Hong Kong (2004) PRC-Macao (2004) ASEAN-PRC (2005) Asia-Pacific Trade Agreement (2005) PRC-Chile (2006) PRC-Pakistan (2007; FTA upgrading is currently under negotiation since 2011) New Zealand-PRC (2008; Start of negotiations for FTA upgrading announced 2016 ) PRC-Peru (2010) PRC-Taipei,China (2010) PRC-Costa Rica (2011) PRC-Singapore (2011) PRC-Iceland (2014) PRC-Switzerland (2014) PRC-Australia (2015) PRC-[Republic of] Korea (2015)

Success Factors in FTAs Deep integration FTAs increase trade among FTA partners (World Trade Report 2011) Deep integration FTAs vs Shallow integration FTAs Shallow integration FTAs: eliminate border measures (i.e. tariffs and quotas) Deep integration FTAs: address behind the border measures (i.e. domestic policies on investments, competition, IPR) WTO+ areas: Promotes deeper integration in areas covered by the WTO WTO-X areas: Includes policy areas not covered in WTO agreements (e.g. competition policy and investment)

Deep Integration FTAs: WTO+ and WTO-X Policy Areas WTO+ areas WTO-X areas Industrial goods Anti-corruption Health Agricultural goods Competition Policy Human rights Custom administration Environmental laws Illegal immigration Export taxes IPR Illicit immigration SPS measures Investment measures Illicit drugs State trading enterprises Labor market regulation Industrial cooperation Technical barriers to trade Movement of capital Information society Countervailing measures Consumer protection Mining Anti-dumping Data protection Money laundering State aid Agriculture Nuclear safety Public procurement Harmonization of legislation Political dialogue TRIMS measures Audiovisual Public administration GATS Civil protection Regional cooperation TRIPS Innovation policies Research and technology Cultural cooperation SMEs Economic policy dialogue Social matters Education and training Statistics Energy Financial assistance Taxation Terrorism Visa and asylum Notes: TRIMS = Trade Related Investment Measures. GATS = General Agreement on Trade in Services. TRIPS = Trade-Related Aspects of Intellectual Property Rights. IPR = intellectual property rights. SMEs = small and medium enterprises. Source: World Trade Report 2011.

Comparison of PRC FTAs Relevant chapters/provisions Tariff lines liberalized (at full implementation of FTA) Customs Administration and Trade Facilitation Sanitary and Phytosanitary Measures Technical Barriers to Trade Trade Remedies Investment Services Financial Services Temporary Entry for Business Person Telecommunications Electronic Commerce Government Procurement Competition Policy Intellectual Property Rights Labor Environment Cooperation and Business Facilitation Development Small and Medium Enterprises Regulatory Coherence Transparency Dispute Settlement PRC-Pakistan FTA (2007) Pakistan: 36.4% of tariff lines (44.4% of imports from PRC) PRC: 35.4% of tariff lines (30.3% of imports from Pakistan) PRC-ASEAN (2005) PRC-Peru (2010) PRC-Australia (2015) Around 98% of tariff lines which comprise 90% (by value) of total trade. Peru: 91.9% of tariff lines (91% of imports from PRC) PRC: 94.6% of tariff lines (99.1% of imports from Peru) Australia: 100% of tariff lines (100% of imports from PRC) PRC: 96.8% of tariff lines (95.1% of imports from Australia) 29

Key provisions in IIAs Definition of investment Admission vs establishment National Treatment Most Favoured Nation Clause Fair and Equitable Treatment Expropriation Free Transfer of investment-related funds Non-economic standards Investor-State Dispute Mechanism (ISDM) Umbrella clause Temporal Scope of Application Source: BITsel Index. http://www.cuhk.edu.hk/law/proj/bitsel/

Success Factors in BITs and RTIAs For BITs, ISDM is most effective to attract FDI (Asian Economic Integration Report 2016) o It can increase the number of FDI projects by 35.3% For RTIAs, nondiscrimination provisions(i.e. National Treatment and MFN clauses) are the most effective element in attracting FDI

Comparison of PRC BITs (2=highest; 1=lowest) PRC- Pakistan (1990) PRC-Rep. of Korea (1992) PRC- Germany (2005) Definition of investment 2 2 2 Admission vs establishment 1 1 1 National Treatment 1 2 2 Most Favoured Nation Clause 2 2 2 Fair and Equitable Treatment 2 2 2 Expropriation 2 2 2 Free Transfer of investment-related funds 1 1 2 Non-economic standards 2 2 2 Investor-State Dispute Mechanism 1 1 2 Umbrella clause 1 1 2 Temporal Scope of Application 2 2 2 OVERALL 1.55 1.64 1.91 Source: ADB calculations using BITsel Index. http://www.cuhk.edu.hk/law/proj/bitsel/

Asia s Infrastructure needs 33

Infrastructure associated with development Note: Infrastructure index is computed based on first principal component of infrastructure stocks in roads, airport, electricity, telephone, mobile, broadband, water and sanitation. Higher values represent greater infrastructure availability. Source: ADB estimates based on data from World Development Indicators, World Bank. 34

Infrastructure investment needs, 2016 2030 ($ billion in 2015 prices) Baseline Climate adjusted Total % of GDP Total % of GDP Central Asia 492 6.8 565 7.8 East Asia 13,781 4.5 16,062 5.2 South Asia 5,477 7.6 6,347 8.8 Southeast Asia 2,759 5 3,147 5.7 The Pacific 42 8.2 46 9.1 Asia and the Pacific 22,551 26,166 5.1 Annual Average 1,503 1,744 5.9 Sources: 2030 population projections from UN Population Division; others are ADB estimates.

Infrastructure investment varies across countries 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 6.8 6.6 latest, 2010-2014, % of GDP 5.7 5.4 5.1 4.9 4.3 4.2 3.7 2.6 2.6 2.5 2.3 2.2 2.1 2.1 1.9 1.8 Public Private GDP = gross domestic product; PRC = People s Republic of China. * Public sector includes central government budget only. Note: Based on BUDGET + PPI measure. Actual budget investments except Armenia, Bhutan, Georgia, Maldives, Myanmar, and Thailand, which are planned or estimated budget investments. Sources: Country sources for public sector investments; Private Participation in Infrastructure Database, World Bank; World Bank (2015); World Development Indicators, World Bank; ADB estimates. 36

OBOR and CPEC in a comparative context 37

Subregional initiatives: Development results CAREC - Significant decline in the time taken to cross borders - CAREC Institute -Almaty-Bishkek Corridor Initiative GMS - Near completion of transport component of its 3 main corridors - GMS Cross-Border Transport Facilitation Agreement fully ratified EAST ASIA - Trans-Mongolian CAREC Corridor - Training programs for GMS and CAREC - Regional Knowledge Sharing Initiative SASEC - Improved access to key markets in smaller economies - Decline in real trade costs - Cross-border power exchanges PACIFIC - Vessel Day scheme led to higher fisheries income - Endorsement of a framework for regional action on climate change 38

OBOR: A framework for inter-regional cooperation 39

HUN SVN CZE IND EST POL LTU LVA SVK ISR QAT BRU MNE MAC HRV SRB ROM TUR MAL BIH PRC BLR KWT MDA PAK UKR IDN ARM GEO AZE BTN OMN BGR IRN JOR RUS MYA KAZ Infra development in OBOR Population density (2014) vs Road Density (2011) 250 500 450 200 400 350 150 300 250 100 200 150 50 100 0 50 0 Road density (km per 100 sqm of land area, LHS) Population density (per sqm of land area, RHS) 40

The concept of economic corridors What? Connects economic agents along a defined geography, and economic nodes or hubs Enables integrated economic networks Why? Policymakers aim to make more effective use of economic geography and move beyond physical connectivity through a multi-sector approach, with public and private sector participation. How? Stages of economic corridor development: Transport corridor Transport and trade facilitation corridor Logistics corridor Urban development corridor Economic corridor 41

Economic Corridor Development Transport and trade corridors Industrial clusters Urban development 42

Narrow Broad Four zones of economic corridor development Zone 2 National + Broad Area development, SMEs, rural roads Zone 4 Regional + Broad Cross-border economic zones Zone 1 National + Narrow Construction, upgrading Zone 3 Regional + Narrow Trade facilitation, logistics National Regional Source: Srivastava, P. 2011. Regional Corridors Development in Regional Cooperation. ADB Economics Working Paper Series No. 258. Manila: ADB. 43

How does an Economic Corridor Develop? Stages Approach Transport corridor Physical infrastructure Multimodal Designed to reduce time and cost of movement of goods and people Transport and trade facilitation (TTF) corridor Soft infrastructure Harmonized corridor institutional framework to facilitate efficient flow of goods and people Measured by progress in cross-border transport operations and border formalities Logistics corridor Similar to TTF corridor, but also encompass warehousing and cold storage investments Urban development corridor Development of city-based economic clusters/nodes and agglomeration Enable multisector approach and private sector participation Transit corridor for landlocked May have some overlap between the stages countries Sources: Banomyong, 2007; Srivastava, 2011; ADB, CAREC 2012 Economic Corridor Attract investment and generate economic activities along less-developed areas Increased private sector participation Well-developed production chains

Economic Corridor Development in Practice: Evolution of ADB s approach Focus on infrastructure investment GMS Linking national to regional corridors Complementing investment in physical connectivity with trade facilitation Corridor town projects Synchronized infrastructure and urbanization strategy Planned economic corridors (Vizag-Chennai & Almaty-Bishkek) Linking major urban and industrial clusters (nodes) Node-centric infrastructure development Pre-requisite: certain level of industrial agglomeration in the nodes

Success and failure factors of SEZs Success factors Fiscal and non-fiscal incentives Factor costs Strategic location, multimodal connectivity Institutional capacity State and local governments commitment and policy stance Failure factors Ambitious goals relative to country s comparative advantage Zones as industrial islands (physical enclaves) Governance and rent seeking Wrong positioning Lack of localized strategy for upgrading industrial value chain and creating technology spillovers Link with development strategy and industrial policy Backward and forward linkages with domestic economy 46

Key Messages 47

Key Messages Given the challenging global environment, developing Asian economies need to integrate more forcefully within the region. PRC s structural transformation provides an opportunity to leverage abundant labor force: investments in infrastructure, hard and soft aspects of trade facilitation, integrated and well designed special economic zones, and improvement in regulatory quality are key.

Key Messages PRC-Pakistan FTA phase two negotiations ought to focus on (i) vigorously increasing the number of tariff lines covered (ii) expanding the coverage of export products in top concessional category (iii) harmonization of custom procedures (iv) behind the border trade facilitation measures. CPEC should be developed through a synchronized infrastructure and urbanization strategy: with multimodal transport networks and special economic zones to achieve industrial agglomeration.

Thank You!! 50