Pak China Free Trade Agreement

Creation of WTO and arriving at the agreement to give all countries equal opportunities ushered a new era in international trade. Simultaneously, different trade groups emerged to ensure collective well-being. NAFTA was the first to emerge, that was followed by European Union (EU) and the story continued. From Pakistan’s perspective it is member of ECO and SAARC but both these blocs have remained muted.

RCD was broadened and given ECO name but remained of no consequence because of Iran facing economic sanctions for more than three decade. Turkey paid more attention to acquiring membership of EU than reviving ECO. Pakistan was engrossed in Afghan war and its internal conflicts due to the war going on in the backyard. SAARC remained ineffective due to Indian hegemony. Under the prevailing scenario Pakistan had no option but to enter into bilateral preferential trade and free trade agreements. Out of these the most important is Pak-China Free Trade Agreement.

Let one point be kept in mind that China is the second largest economy of the world that has attracted huge investment from United States and also emerged as one of its main trading partners, as against this Pakistan was often labeled ‘failed state’ with nineties being called ‘lost decade’. Pakistan’s economy has virtually collapsed due to influx of Afghan refugees due to USSR attack on Afghanistan in late seventies, war going in the country for nearly four decades and country emerging as the worst victim of terrorism/militancy/extremism.

As foreign investment dried, Pakistan had to look for a friend who could help in strengthening the local infrastructure as well as manufacturing base. China, a time tested friend extended the support in building infrastructure and power plants. China also tried to revive trade through ‘all season’ KK highway, previously known as ‘Silk Route’, the oldest trade corridor.  There was substantial increase in bilateral trade between the two countries even prior to the signing of FTA, which has removed barriers to further smoothen the trade.

Pakistan and China signed FTA in 2006 and its scope was to broaden with the passage of time. Reviewing the ground realities after almost 8 years leaves a strange feeling. Certain groups having vested interest are making Pakistanis scared rather than preparing them for exploiting the opportunities. One needs to look at the discussions going on with a different perspective.

Some quarters are certainly unhappy with the time test cordial relationship between the two countries and wish to create hurdles. Be it the growing militancy in Chinese areas adjoining Pakistan or unrest in Baluchistan these are not isolated but planned moves to create disturbances in economic cooperation between the two countries. The much talked about hue and cry created by the businessmen having vested interest also needs to be seen in the same perspective.

Since early days Pakistan and China have enjoyed most cordial relationship. With the passage of time friendship has been further consolidated with China first building the silk route, establishing heavy mechanical and electrical complexes in Pakistan. The economic cooperation further consolidated with construction of Gwadar port and two nuclear power plants.

While some cynics term Chinese presence in Pakistan as a security threat, others very strongly believe that  economic cooperation between the two countries will usher new era based on ages old premise ‘Pakistan is a natural trade and energy corridor’.  The latest move to achieve this dream is construction of Gwadar to Kashgar road and rail links.

Over the years China remained a major buyer of textile intermediate goods and lately embarked upon acquiring stake in Pakistani textiles and clothing industry. The move was also seen with great suspicion but very few were able to accept it as part of the strategy followed by the developed countries. With manpower becoming scarce and expensive developed countries shift their labor-intensive manufacturing facilities to developing/least developed countries which continue to enjoy abundant cheap manpower.

It is being alleged that Pakistan has become a dumping ground for cheap and inferior quality Chinese products. This perception gets some credence when one visits Pakistani markets. However, no one can deny the fact that China is known for producing superior quality products which are bought by United States and European countries. Therefore, it may be said that Pakistani importers are deliberately buying cheap goods, which are mostly brought into the country through land route.

The fear that Chinese textiles and clothing industry would cause material injury to Pakistani manufacturers is partly true and partly a myth. Pakistani manufacturers of textiles and clothing compete in the global market with many countries including China. Those manufacturers have been able to compete which go for value addition and produce superior quality products. However, even the most efficient ones face eroding competitiveness because of some structural weaknesses i.e. higher electricity and gas tariffs, prolonged outages, poor law and order situation and above all negative perception about Pakistan.

It goes without saying that whenever two countries sign preferential or free trade agreements in the initial period negative list are prepared comprising of products that are sensitive for both the countries. Therefore, presence of negative lists should not of any surprise for Pakistanis. If Pakistani were not able to identify sensitive products the blame should not go to China.

The beauty of PCFTA agreement is that Pakistan should be buying more of machinery, raw materials and chemicals from China and supplying it goods in which it enjoys comparative advantage i.e. textiles and clothing, sports goods, surgical instruments and seafood (China is the biggest buyer of fish and other species which are not consumed in Pakistan).

China can become the biggest source for textile machinery and Pakistan by converting the entire cotton produced in the country into value added products become a major source of textiles and clothing for China. A fact must be kept in mind that Chinese manufacturers are shifting their manufacturing facilities or establishing manufacturing units in other countries. Pakistan enjoys the competitive advantage and energy shortage will also be overcome with Chinese investment in power plants in Pakistan.

China is the second largest crude oil consuming country after United States. It buys oil from Iran and other countries which is taken by ships through long route. Pakistan has attained self sufficiency in some POL products and output can be further enhanced by operating refineries at optimum capacity utilization. Two pipelines (one for black oil and other for white oil) and mid country refinery, PARCO, can become a major source of POL products for those parts of China which enjoy common border with Pakistan.

Bilateral trade between China and Pakistan is only a fraction of trade between China and India. Exports from India have increased because of supporting policies of the government. As against this Pakistani exporters look for the crutches like textile quota, GSP and cotton at below international prices but are hardly ready to bring efficiency, economy of scale, synergy through BMR/expansion.

In Pakistan many of spinning mills have 14,400 or even lesser spindles, which don’t make economically viable units. Bulk of cloth is produced on power looms and processed in obsolete plants; the result is inferior quality and high cost of production.

Analysis of ginning factories also shows that cotton staple is damaged due to use of outdated/obsolete machinery. The result is that cotton that is capable of producing 30 and above counts of yarn ends up in producing coarse counts of yarn, this is waste of resource.

The purpose of mentioning a few examples is that if the country is serious in attracting foreign invest, be it from China or any other country the required steps are: 1) creating enabling environment, 2) encouraging local investment, 3) promoting joint ventures and above all changing the existing negative perception about the country.

It is encouraging that China has shown keen interest in investing in Pakistan. Signing of MoUs may be the first step, but executing the projects is most crucial. The response to the recent IPO of Engro Powergen, enjoying Chinese support  is just the tip of iceberg. Chinese investment in infrastructure will certainly help in the creation of enabling environment but Pakistan has to be developed as trade and energy corridor.

 

Declining oil prices: Boon or bane

After having posted a blog titled ‘Winners and losers of oil war’ on November 22, 2014, I kept on searching my soul. I felt embarrassed for talking about the oil producers only and ignoring the consumers altogether. It also dawned that both United States and Saudi Arabia have kept oil prices high to achieve their own selfish motives. It may also be said that Saudi Arabia are an accomplice in this crime against humanity because common men were the worst hit.

Saudi Arabia has nurtured its own worst enemy in oil trade. The largest oil producing country failed in realizing that prices were kept high to enable shale oil and gas production economically viable in the United States. Saudis were looking on one side of the coin, extra petro dollars to finance their lavish spending and never thought that one day United States would become their worst competitors, may be, because many in this world fail to look beyond their nose and Arabs were no exception.

As all and sundry know that media is controlled by west, particularly the Zionists, it is trying to create an impression that Saudi Arabia has initiated oil war against United States. While all the report suggests that OPEC should curtail production none has pointed out that United States should curtail its output.

Global media has also not being honest as it talks very little about the benefits of nearly 40% decline in oil prices. Many non-oil producing countries that were victim of high oil prices have witnessed signs of improvement in their economies. Industries like airlines and shipping have wiped-out huge accumulated losses and inflation around the world has come down.

Reduction in oil prices has also opened the Pandora Box that many of the governments have been keeping POL prices high to earn extra revenue. One of the reports has exposed that in United Kingdom retail price of motor gasoline include one-third tax. Such countries may also feel upset with the decline in crude oil price. The British government may not be alone; dozens of other countries may also be doing the same.

The time has come to decide if the interest of a few monarchs and oil tycoons is important or the millions of people deserve a better life. Oil politics has led to wars in many countries the most naked examples being Iraq, Sudan, Nigeria, Iran and Libya. One point has to be kept in mind that higher oil prices have made lives of millions of people miserable.

May be, the time has come to establish a global regulatory authority to oversee, monitor and control crude oil production and prices. No country should be allowed to protect the interest of a few oil producing companies only. If some of the shale oil producers could sell oil below US$50 a barrel and make profit why should inefficient companies be allowed to thrive by ripping off millions of people around the world.

US shale oil dream shattering

I am a student of geopolitics and also write a blog, ‘Geo Politics in South Asia and MENA’. Spending nearly 30 months in trying to understand the dynamics of the area of my interest I have reached a conclusion, the US has created more foes than friends.

Going a little further in history the other glaring examples are sponsoring proxy war in Syria, toppling regimes of its own ‘installed rulers’, attacking Iraq for alleged possession of weapons of mass destruction and Afghanistan for providing refuge to Osama bin Laden and its Ambassador supporting rebels in Libya.

The worst victim of its hegemony is Iran, the country facing the worst sanctions for more than three decades simply on the pretext (having no grounds whatsoever) that it is a threat for the kingdoms located in Arabian Peninsula and Israel. The Muslim Arabs have been so thoroughly brain washed that they now openly say ‘Iran is a bigger threat as compared to Israel’.

The supported Saudi Arabia in keeping crude oil prices high with two motives: 1) to sell more arms to Saudi Arabia and other Middle Eastern monarchies and 2) to attract investment in shale oil and gas for freeing itself from imported oil.

After having achieved the status of largest oil producing country in the world now the United States wants: 1) to teach a lesson to Iran and Russia already facing tough economic sanctions and 2) to test the lowest price level at which production of shale oil and gas remain economical.

It is no secret that the United States enjoy power to cause disruption in global oil supplies by asking its ‘operators’ in Iraq, Syria, Libya, Nigeria and Sudan to enhance level of their activities, imposing stringent sanctions on Iran and Russia. However, this is one side of coin and the other should also be looked at dispassionately,

To begin with, Saudi Arabia has supported the United States in keeping crude oil prices high to achieve its motives that include 1) buying more arms, 2) punishing Iran, 3) mobilizing funds for the rebels and 4) continue the legacy that it enjoys power to determine oil price. However, attaining the status of largest oil producer has shattered Saudi dream because Middle East has gone very low on priority list of largest oil consuming country, the United States.

When it comes to ‘business interest’ even the best friends turn the worst foe that is the inference on could draw from current Saudi-US rift. Saudis have a grudge against the United States which refused to attack Syria and helped in easing sanctions on Iran, is now capturing its share in oil market. Let one point be kept in mind that United States is curtailed import but has not started exporting oil as yet due to ban on oil export. This ban could be removed any minute.

The United States also suffers from an illusion that low crude prices will have adverse impact on Saudi Arabia, Russia and Iran. It is true that Saudi revenue will decline substantially in the short term but higher cost of production of shale oil may lead to many delinquencies and may deciding to stop production. Production of shale oil at US$60/barrel is not economically viable.

Russia will also face reduction in revenue from oil but it continues to enjoy control on gas being supplied to other European countries. An attempt to stop/curtail supply during winter can help in getting the sanctions removed and the added advantage is that lower oil prices can usher greater economic activities in the country, help in producing exportable surplus and improving competitiveness in the global markets.

A closer look at Iran highlights: 1) probability of easing economic sanctions due to the United States no longer being dependent on Middle East for supply of oil, 2) European countries having keen interest in investing in Iran’s energy projects offering very attractive returns, 3) Iran also making concerted efforts to boost non-oil exports and 4) supporting Saudi Arabia in maintaining current level of OPEC production to ease tension between the two countries.

Almost all the non-oil producing countries are more than happy with the decline in crude oil prices as they these are able to accelerate economic activities, airlines able to wipeout accumulated losses and benefit of lower cost of production to help in improving purchasing power of domestic consumers.

To conclude, I would like to refer to a news item released by Bloomberg. The United States is becoming victims of its own success. At prices hovering around US$70/barrel, drilling is close to becoming unprofitable for some explorers, said Leonid Fedun, Vice President and board member at OAO Lukoil (LKOD).

In Russia, where Lukoil is the second-largest producer behind state-run OAO Rosneft (ROSN), the industry is much less exposed to oil’s slump, Fedun said. Companies are protected by lower costs and the slide in the ruble that lessens the impact of falling prices in local currency terms, he said.

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than US$4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

At the moment, some producers in the United States are surviving because they managed to hedge the prices they get for their oil at about U$90 a barrel, when those arrangements expire, life will become much more difficult, said Fedun.

  

Winners and losers of oil war

In less than one year time crude oil prices have come down by more than 30 percent and it is expected that the downward trend will continue for a while. The United States having emerged as the largest producer of oil does not seem in a mode to curtail its oil production. Smaller oil producing member countries of OPEC are proposing reduction in daily production. All eyes are set at forthcoming OPEC meeting. While non-oil producing countries are more than happy with the reduction in price, it seems both the United States and Saudi Arabia want to show the world that one of them controls oil prices, who is that?

I have stated in my last blog that many wondered why Saudi Arabia has been supporting the United States in keeping oil prices high. My perception is that since United Stated was working on shale oil and also wanted to keep Iran from oil market it lured Saudi Arabia to produce extra oil and mobilize more petro dollars. During this period Arabs were brain washed and made to believe that Iran was a bigger enemy as compared to Israel. This allowed the United States to sell over US$36 billion arms to Saudi Arabia in one year. Since United States refused to fight proxy Saudi war against Syria and Iran the King and his allies were upset. Signing of an interim agreement between the superpowers and Iran further annoyed the Arabs.

Historically, Saudi Arabia has been extending its support to the United States in keeping oil prices high, but this time it is reduction in production which the monarchs of Arabian Peninsula don’t like at all. Instead of carving any mutually acceptable strategy OPEC led by Saudi Arabia is trying to enhance production to maintain its revenue levels. This policy has led to the decline in oil prices which was certainly not liked by United States. The reason is obvious Shale oil production in not economically viable below US$80/barrel. Saudi Arabia still believes that shale oil production will not remain economically viable if prices decline below US$70.

After attaining the position of largest oil producing country after more than three decades the United States seems to suffer from the illusion that it has also attained control to fix price. To avoid any adverse price movement United States has not officially removed ban on oil export and its stockpiles are at record high. Instead of capping its own production the super power wants OPEC members to cut production of oil. There is high probability that OPEC may agree to this proposal to boost its petro dollar income. If this happens it will become too evident that oil producers other than United States and particularly Arabs have lost pricing control.

Oil is the most geopolitically important commodity. It drives economies around the world and is located in some usually very volatile places. Now U.S. crude production exceeds 9 million barrels a day, the most since at least January 1983. Over the last 10 years, the defining factor in the oil market was the growth of China and Chinese oil demand but at present the defining factor is the growth of U.S. oil production.

While making attempts to achieve this position, the United States has also been able to prove to the world that it remains the sole super power. Some experts say a new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Surging U.S. oil production enabled United States and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Now Russia faces a catastrophic slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine.

The first prey of this policy is Russia, which is the second largest producer of energy products outside OPEC. One can still recall that plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela.

The second prey is Saudi Arabia that is trying to prove it still enjoys pricing power. If it succeeds in plunging the price down to $60 or $70 a barrel, there could be a slowdown in the U.S. shale oil production but the world is not going to see it stop. The factors that can possible reverse the trend are: 1) terrorist attacks on a few oil fields in the volatile Middle East, 2) production cut by OPEC and 3) revival of global demand but neither is likely in the near term.

The third prey is Iran, like Russia its economy has been weakened by economic sanctions due to its nuclear program. The steps by the United States and its allies have almost closed Iran’s oil and gas fields to investment over the last decade, limiting the country’s access to technology to boost output. The nation needs to achieve enhance its oil revenue to keep its budget in balance. The decline in crude prices and a Nov 24 deadline for a nuclear accord are raising pressure on Iranian president elected last year on the promise to end Iran’s isolation and revive growth. If he succeeds in striking a deal and sanctions are lifted and the country is allowed to increase its oil exports, price may come under further pressure.

Oil producers, other than United States have to agree on the bottom prices if their governments want to survive. Social turmoil could paradoxically help prop up prices in the short term if output is disrupted, but that may not be the real solution.

The biggest winner in oil war will be the United States with Increasing energy independence, it will become less vulnerable to supply disruptions that will also provides added leverage in international negotiations, whether with Iran over its nuclear program or with Russia over its intentions in Ukraine.

China is also likely to emerge as a big winner, as it imports almost 60 percent of its crude. The world’s second-biggest economy probably will take advantage of the savings to build up its strategic reserves rather than dedicating the funds to increased spending on defense or any other program. The plunging oil prices will also gives the nation leverage in its dealings with Russia. The two countries signed a US$400 billion, 30-year gas-supply accord in May during a summit in China and then deepened their energy ties earlier this month by signing a preliminary agreement for a second Russia-China pipeline. China will always have an upper hand in dealing with Russia as long as crude prices stay low as Russia needs the energy income dearly.