The China−Pakistan Strategic Relationship: Trade, Investment, Energy and Infrastructure

Abstract

The traditional Sino-Pakistan friendship of 55 years now has a new objective—to improve the economic content of their relationship, which comprises trade, investment and energy co-operation within a bilateral framework. The result of this determination to implement the new economic agenda is visible in the quantum of Chinese investment in Pakistan. However, there are indications that the trade agenda may be too ambitious or needs a larger restructuring of the Pakistani economy that will take time since it requires implementation of policy changes combined with participation in these initiatives from the business community of Pakistan. While investment primarily benefits Pakistan, trade provides China access to a new market for its goods. It will eventually do the same for Pakistan. Energy co-operation will benefit China as it will gain access to energy supplies through Gwadar port, an alternate route to the one through the Malacca straits, and will serve to develop its western regions. Pakistan has in turn gained from the large-scale infrastructure development that has taken place in Gwadar and will continue to do so once future plans make headway.

Sumita Kumar is Research Officer at IDSA.

Notes

¹ ‘Pakistan, China to Further Deepen Strategic Ties: Joint Statement’, April 20, 2007, at http://pk.china-embassy.org/eng/zbgx/t313472.htm (Accessed June 4, 2007).

² Zhao Gancheng, ‘China's South Asia Policy: Balancing and Stabilising’, Regional Studies, 23(3), 2005, p. 3.

³ Zhang Lijun, ‘Balancing Act’, Beijing Review, 49(23), 2006, p.10; Fazal-ur-Rahman, ‘Pakistan-China Economic Relations: Opportunities and Challenges’, Strategic Studies, 26(2), 2006, p. 61.

⁴ Shaheen Akhtar, ‘Pak-China Economic Relations: Forging Strategic Partnership in the 21st Century’, Regional Studies, 19(3), 2001, p. 45.

⁵ Pakistan 1988: An Official Handbook, Ministry of Information and Broadcasting, Government of Pakistan, 1989, p. 142 cited in Madhu Bhalla, ‘Sino-Pakistani Trade and Economic Relations,’ Peace Initiatives, 5(3–6), 1999, p. 140.

⁶ Shaheen Akhtar, no. 4, pp. 46–47; Fazal-ur-Rahman, no. 3, p. 56.

⁷ Fazal-ur-Rahman, no. 3, p. 55.

⁸ Ibid., pp. 55–56, and B. Raman, ‘Zhu Rongji's Visit to Pakistan’, South Asia Analysis Group, Paper No. 244, May 22, 2001, pp. 3–4, at http://www.saag.org/papers3/paper244.html (Accessed June 5, 2007).

⁹ Fazal-ur-Rahman, no. 3, pp. 56–57; Atul Kumar, ‘China−Pakistan Economic Relations’, IPCS Special Report, No. 30, September 2006, p. 8, at http://www.ipcs.org (Accessed October 16, 2006).

¹⁰ Fazal-ur-Rahman, no. 3, p. 62; Chinese Feasibility Study on Free Trade Agreement, March 15, 2005, cited in Fazal-ur-Rahman, no. 3, pp. 68–69.

¹¹ According to the EHP, Pakistan could take its products into China without any tariff on 769 items, which mainly include vegetables, fruits, stone, cotton grey cloth and blended cloth. China could export 486 items to Pakistan without any tariff and this includes vegetables, fruits, stone, textile machinery and organic chemicals. At the same time, both countries were to give preferential tariff to goods originating from the other country, China to 1671 goods from Pakistan, and Pakistan to 575 goods from China. ‘China, Pakistan Sign Agreement on “Early Harvest” Tariff Program’, January 6, 2006, at http://pk2mofcom.gov.cn/column/print.shtml?/Nocategory/200601/20060101299372 (Accessed May 27, 2007).

¹² Fazal-ur-Rahman, no. 3, p. 70 and pp. 68–69.

¹³ Shimaila Matri, ‘From China With Love’, Newsline, 16(4) 2003, p. 78.

¹⁴ ‘Exports to China Jump 39 per cent in 2005’, Ministry of Foreign Affairs of the People's Republic of China, January 28, 2006, at http://www.fmprc.gov.cn (Accessed October 16, 2006).

¹⁵ While the first two rounds of these negotiations related to putting in place the EHP and were held prior to January 2006, during the third round, the draft text of the chapters of the bilateral FTA were discussed for the first time. The Third Round of FTA negotiations with China were concluded on May 18, 2006. During the fourth round of talks held in Beijing in October 2006, negotiations were carried out on issues of market access, trade remedy and investment. At the fifth round of talks which took place November 7–10, 2006 in Beijing, a consensus was reached on market access and the draft text of the FTA. ‘The 3rd Round of Pak−China FTA Talks’, May 18, 2006, at http://pk2.mofcom.gov.cn/column/print.shtml?/chinanews/200605/20060502262215; ‘4th Round Negotiation on China−Pakistan Free Trade Area Concluded’, October 14, 2006, at http://pk2.mofcom.gov.cn/column/print.shtml?/chinanews/200611/20061103737041; ‘5th Round on China-Pak FTA Concluded’, November 13, 2006, at http://pk2.mofcom.gov.cn/column/printshtml?/chinanews/200611/20061103737014 (Accessed May 27, 2007).

¹⁶ Nirupama Subramanian, ‘China, Pakistan Ink Pacts on AWACS, FTA’, The Hindu, November 25, 2006.

¹⁷ Fazal-ur-Rahman, no. 3, p. 70.

¹⁸ ‘Q&A on China-Pakistan Free Trade Agreement By Chong Quan, Spokesman of Ministry of Commerce’, November 27, 2006, at http://chongquan2.mofcom.gov.cn/column/print.shtml?/speech/200611/20061103865611 (Accessed May 19, 2007). The FTA is comprehensive and charts a road map for implementation of a FTA between China and Pakistan to the benefit of both. It covers trade in goods and investment. Both countries are expected to reduce or eliminate tariffs for all products in two phases starting July 1, 2007. During the first five years, which constitute Phase I, both sides will eliminate tariffs of 36 per cent tariff lines, and they will reduce tariffs of 49 per cent tariff lines within five years of entry into force of the agreement. The remaining 15 per cent of tariff lines will not be subject to tariff reduction or elimination at this stage. Phase II will begin from the sixth year of the agreement coming into force, with the aim of eliminating the tariffs of not less than 90 per cent of products, in terms of tariff lines and trade volumes, within a reasonable timeframe. The agreement lays the ground for increased investment co-operation between the two countries by defining promotion, protection, and treatment of investment and dispute settlement. Systems have been put in place for increased bilateral trade and economic cooperation, providing access to markets and providing access to cheaper goods to consumers in both countries. It will help manufacturers to get raw material at lower cost and as rules for foreign investment become easier it will attract foreign capital.

¹⁹ Ishrat Husain, ‘Economic Policy Reforms in Pakistan 1999–2006’, Paper presented at the conference on ‘Economic Policy Reforms in Asia’, Stanford University, Palo Alto, CA, USA June 1–3, 2006, at http://scid.stanford.edu/events/PanAsia/Papers/Husain.pdf (Accessed June 4, 2007)

²⁰ ‘Pakistan, China to Further Deepen Strategic Ties’, no. 1.

²¹ ‘Q&A on China-Pakistan Free Trade Agreement By Chong Quan, Spokesman of Ministry of Commerce’, November 27, 2006, no. 18.

²² Fazal-ur-Rahman, no. 3, p. 54.

²³ Ibid, p. 69.

²⁴ Ibid, p. 71.

²⁵ These include ZTE, Huawaie Technologies, BGP (Pakistan) International, Metallurgical Construction Corporation of China (MCC), China Harbour Engineering, China International Water and Electrical Corporation, China Petroleum, Dong Feng, China Ocean Shipping, Haier. ‘Brief on China’, Board of Investment, Government of Pakistan, at http://www.pakboi.gov.pk/Country_Brief/China.pdf (Accessed June 4, 2007).

²⁶ Syed Fazl-e-Haider, ‘China's Growing Stake in Pakistan’, Asia Times Online, November 30, 2006, at http://www.atimes.com/atimes/South_Asia/HK30Df01.html (Accessed June 4, 2007).

²⁷ Ishrat Husain, no. 19, p. 7.

²⁸ Mehmood-ul-Hassan Khan, ‘New Heights of Pak-China Ties’, March 5, 2006, at http://www.usamediamonitors.net/continent/view/full/27754, cited in Fazal-ur-Rahman, no. 3, p. 58.

²⁹ Chinese Feasibility Study on Free Trade Agreement, cited in Fazal-ur-Rahman, no. 3, p. 64.

³⁰ Naween A. Mangi, ‘Pakistan National Bank Seeking China Venture Partner’, International Herald Tribune, April 18, 2007, at http://www.iht.com/bin/print.php?id=5329488 (Accessed June 5, 2007).

³¹ ‘Brief on China’, Board of Investment, Government of Pakistan, no. 25.

³² Ibid.

³³ ‘Pakistan, China to Further Deepen Strategic Ties’, no. 1.

³⁴ Fazal-ur-Rahman, no. 3, p. 66.

³⁵ ‘Pakistan, China to Further Deepen Strategic Ties’, no. 1.

³⁶ ‘Pakistan Welcomes Chinese Investment: PM’, Associated Press of Pakistan, at http://www.app.com.pk/en/index.php?option=com_content&task=view&id=3894&Itemid=2 (Accessed June 4, 2007).

³⁷ Syed Fazl-e-Haider, ‘Chinese Eye Pakistan's Real Estate’, Asia Times Online, January 17, 2007, at http://www.atimes.com/atimes/South_Asia/IA17Df03.html (Accessed June 4, 2007).

³⁸ Ibid.

³⁹ Ibid.

⁴⁰ ‘Pakistan, China to Further Deepen Strategic Ties’, no. 1.

⁴¹ The News, February 22, 2006, cited in Fazal-ur-Rahman, no. 3, p. 67.

⁴² Fazal-ur-Rahman, no. 3, p. 59.

⁴³ John W. Garver, ‘Development of China's Overland Transportation Links with Central, South-west and South Asia’, The China Quarterly, 185, March 2006, pp. 1–2.

⁴⁴ Saibal Dasgupta, ‘Pak Bends Over Backwards for Beijing, Offers Oil Backup’, The Times of India, March 20, 2007.

⁴⁵ Muhammad Iftikhar Raja, ‘Karakoram Highway-The Friendship Bridge Across the Himalayas’, Beijing Review, June 8, 2006, p. 7.

⁴⁶ Dawn, July 5, 2006, cited in Public Opinion Trends (POT) Pakistan, 34(156), July 6, 2006, p. 2.

⁴⁷ ‘Why China is so Eager to Invest at Gwadar?’ Pakistan & Gulf Economist, May 29−June 4, 2006, p. 56.

⁴⁸ Dawn, February 20, 2007, cited in Public Opinion Trends (POT) Pakistan, 35(43), February 21, 2007, p. 40.

⁴⁹ David Montero, ‘China, Pakistan Team Up on Energy’, The Christian Science Monitor, April 13, 2007, at http://www.uofaweb.ualberta.ca/CMS/printpage.cfm?ID=59965 (Accessed June 8, 2007).

⁵⁰ Text of the joint statement between the Islamic Republic of Pakistan and the People's Republic of China, February 21, 2006, at http://pk.china-embassy.org/eng/zbgx/t236947.htm (Accessed June 8, 2007).

⁵¹ ‘Pakistan-China Energy Forum Held in Islamabad’, Ministry of Foreign Affairs of the People's Republic of China, May 3, 2006, at http://www.fmprc.gov.cn (Accessed October 16, 2006).

⁵² Joint Statement Between the People's Republic of China and the Islamic Republic of Pakistan, November 25, 2006, at http://pk.china-embassy.org.eng/zbgx/t282202.htm (Accessed June 8, 2007).

⁵³ Nirupama Subramanian, ‘China, Pakistan Ink Pacts on AWACS, FTA’, The Hindu, November 25, 2006.

⁵⁴ ‘Pakistan, China to Further Deepen Strategic Ties’, no. 1.

⁵⁵ Ambassador (Retd.) Ishrat Aziz, ‘Gulf Oil and India's Energy Needs’, India Strategic, 1, February 2006, pp. 47–48.

⁵⁶ Nandakumar J, ‘India, China and Energy Security’, Asia Times, February 7, 2004, at www.uofaweb.ualberta.ca/chinainstitute/ (Accessed October 16, 2006).

⁵⁷ Steve A. Yetiv and Chunlong Lu, ‘China, Global Energy and the Middle East’, Middle East Journal, 61(2), 2007, p. 199.

⁵⁸ Shamim Ahmed Rizvi, ‘Is Pakistan an Energy Starved Country?’, Pakistan & Gulf Economist, July 3–9, 2006, p. 19.

⁵⁹ Shaheen Akhtar, no. 4, p. 49.

⁶⁰ Amanullah Bashar, ‘Pakistan-China Cooperation in Energy Sector’, Pakistan & Gulf Economist, 22(49), December 8–14, 2003, pp. 12–13.

⁶¹ BBC News, ‘President Musharraf promises to make Pakistan energy corridor for China’, June 15, 2006 at http://www.uofaweb.ualberta.ca/chinainstitute/ (Accessed October 16, 2006).

⁶² Shamim Ahmed Rizvi, ‘Pakistan China Energy Forum’, Pakistan & Gulf Economist, May 8–14, 2006. p. 10.

⁶³ In 2005, 47.2 per cent of China's oil imports were from the Persian Gulf. Table on Percentage of Petroleum (Oil) Imports from Saudi Arabia, Iran and the Persian Gulf in the Total Gross Petroleum (Oil) Imports, 1994–2005, Steve A. Yetiv and Chunlong Lu, no. 57, p. 204.

⁶⁴ Ian Storey, ‘China's Malacca Dilemma’, The Jamestown Foundation, China Brief, 6(8), 2006, at http://www.jamestown.org/ (Accessed October 16, 2006).

⁶⁵ Ibid.

⁶⁶ Chietigj Bajpaee, ‘India, China Locked in Energy Game’, Asia Times, March 17, 2005.

⁶⁷ Ni Yanshuo, ‘Corridor of Cooperation’, Beijing Review, 49(13), March 30, 2006, at http://www.bjreview.com.cn/06–13-e/w-4.htm (Accessed December 6, 2006).

⁶⁸ ‘Economic Viability of Chinese-aided Strategic Port Development Questioned’, The News (Islamabad), August 26, 2001; John W. Garver, no. 43, pp. 8–9.

⁶⁹ Tarique Niazi, ‘Gwadar: China's Naval Outpost on the Indian Ocean’, China Brief, 5(4), February 15, 2006, at http://www.jamestown.org/ (Accessed October 16, 2006).

⁷⁰ ‘Pakistan to Offer New Incentives to Chinese Energy Explorers’, Asia in Focus, October 3, 2006, at http://www.uofaweb.ualberta.ca/ (Accessed December 6, 2006).

⁷¹ ‘Pak-China Oil, Gas Cooperation Rapidly Growing: Official’, Xinhua News Agency, September 19, 2006.

⁷² ‘China to Strengthen Energy Cooperation with Pakistan’, Xinhua News Agency, August 16, 2006.

⁷³ Joint Statement Between the People's Republic of China and the Islamic Republic of Pakistan, November 25, 2006, no. 52.

⁷⁴ ‘China to Help Pakistan Drill Oil, Gas Wells’, Pakistan Press International Information Services, November 2, 2006, at http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=52287&nav02=43874&nav01=43 (Accessed June 8, 2007).

⁷⁵ ‘China's Zhenhua Oil Wins Oil and Gas Exploration Rights in Pakistan’, Xinhua Financial Network, March 30, 2007 at http://www.uofaweb.ualberta.ca/CMS/printpage.cfm?ID=58757 (Accessed June 8, 2007).

⁷⁶ Syed Fazl-e-Haider, no. 26.

⁷⁷ Bill Gertz, ‘China Builds Up Strategic Sea Lanes’, The Washington Times, January 18, 2005, at www.washingtontimes.com (Accessed December 6, 2006). While this particular report has not mentioned Sri Lanka, according to other media reports China is exerting similar influence in this country as well. Brahma Chellaney, ‘Dragon's Foothold in Gwadar’, The Asian Age, April 7, 2007.

⁷⁸ Brahma Chellaney, no. 77.

⁷⁹ Tarique Niazi, no. 69.

⁸⁰ Ibid.

⁸¹ For more details see Shirley A. Khan, ‘China and Proliferation of Weapons of Mass Destruction and Missiles: Policy Issues, Congressional Research Service Report for Congress, Updated October 2, 2006, p. 43, at http://www.fpc.state.gov/documents/organization/74899.pdf (Accessed October 15, 2006)

⁸² ‘Pakistani PM Hails Chashma Nuclear Power Plant’, at http://www.pk.china-embassy.org/eng/2bgx/l228923.htm, December 28, 2005. (Accessed October 15, 2006)

⁸³ ‘Hu Promises Pak the Moon’, Hindustan Times, November 27, 2006.

⁸⁴ For related articles see Michael Krepon, ‘Negotiating the US-India Nuclear Cooperation Deal’, The Henry L. Stimson Center, at http://www.stimson.org/southasia/pubs.cfm?ID=267 (Accessed October 15, 2006) and ‘China, Pakistan Close to Signing Nuclear Cooperation Deal’, at http://www.intelligence-summit.blogspot.com/2006/08/china-pakistan-close-to-signing.html (Accessed October 15, 2006)

⁸⁵ Daily Times, January 5, 2006; cited in Public Opinion Trends (POT), Pakistan Series, 34(5), p. 16.

⁸⁶ Nation, February 22, 2006; cited in Public Opinion Trends (POT), Pakistan Series, 34(45), February 24, 2006, p. 10.

⁸⁷ Nation, October 5, 2006; cited in Public Opinion Trends (POT) Pakistan Series, 34(233), October 6, 2006, p. 8.

⁸⁸ Nation, August 12, 2006; cited in Public Opinion Trends (POT), Pakistan Series, 34(189), August 14, 2006, p. 14.