Pakistan’s Experience with the Pakistan–China FTA: Lessons for CPEC

Abstract

As Pakistan enters the CPEC era, there is a sense of optimism as well as concern in the country, given the uncertain economic impact of this major collaboration between China and Pakistan. Using firm-level and trade data, we empirically test the impact of the 2006 free trade agreement (FTA) between the two countries on the productivity, size and value added of potentially affected Pakistani firms. These results have important policy implications for CPEC initiatives. We start with a difference-in-difference analysis, comparing trends in those sectors in Pakistan made more vulnerable by tariff reductions on Chinese goods relative to sectors for which the tariff did not change significantly. Next, we examine those sectors in Pakistan that were given greater access to Chinese markets through reductions in the Chinese tariff on Pakistani goods relative to sectors for which market access remained roughly the same. In the sectors made more vulnerable by reductions in Pakistani tariffs on Chinese goods, imports to Pakistan have risen, while productivity, value added and value added per worker have fallen relative to other sectors since the FTA. In the sectors for which Pakistan gained access to Chinese markets, exports and employment have risen, but productivity and value added have fallen relative to other sectors since the FTA.