Rise of the Dragon – by Abdul Samad

Cross-posted from Pakistan Blogzine

China’s epic rise as a military and an economic powerhouse over the last few decades is more like a fairy tale. This unprecedented metamorphosis has led to China’s pre-mature coronation as the next big thing. Analysts, excited by the Chinese inexorable advance in the last decade, have based their arguments on conjecture. Careful scrutiny reveals that the newly crowned superpower is lagging behind in a multitude of areas ranging from living standards to infrastructure development. The American economy is more than twice its counterpart, a fact that serves to epitomize why reports that the world is no longer uni-polar are premature .That being said, the prediction could well have a dose of veracity if China continues to grow at its current rate. Give China 30-40 more years of peace and growth and you have a superpower in the making, ready to usurp the title of the world’s economic powerhouse from the Americans.

Such a metamorphosis could have wide reaching implications for Pakistan’s economy. That such a big economy is present in the vicinity poses a threat as well as an opportunity. The threat comes in the form of increased competition, a word that is likened to the very definition of a Chinese citizen. China’s policy of dumping, which decimates competition from the domestic market, has been largely effective despite widespread protests by countries that cannot match China’s low wages. The staggering Chinese budget surplus stands to testify why China poses a significant economic threat to any nation. This argument is epitomized by the American trade deficit, which is a culmination of the low cost of production in China. On the brighter side, this opens up avenues of investment in a cash starved country like Pakistan. This lack of funds sheds light on the difficulty of breaking the debt cycle amongst developing countries, an abyss which leads to the middle of nowhere. China may well provide the answer to this quagmire. The growing relations between the United States and India will ultimately prompt Pakistan to push for even closer ties with its longtime strategic security partner, China. India, in its own right, has transmuted itself into an economic juggernaut which underlines why it is imperative for Pakistan to foster a climate of harmony and understanding with China.

Presently, Pakistan and China are cooperating closely in the development of Gwadar Port, which would bolster economic activity in Pakistan and provide an important access route for the landlocked countries of Central Asia. China’s burgeoning presence can be gauged from the increase in development of infrastructure and setting up of basic industries in Pakistan. Names like, ZTE, Huawei Technologies Co Ltd, China National Machinery Imp/Exp Corporation, Metallurgical Construction Corporation of China are the notable firms that have set production processes in Pakistan. In the last few years, investment of more than 1.3 billion USD was made by China in Pakistan. China has opened up its Western region adjoining Pakistan for trade and investment. The rationale behind this move is to reduce the economic disparity between its developed coastal regions and other underdeveloped areas. Once developed, this region would be a hub for economic activity between China, Central Asia and South Asia.

Considering that, in the past, America has left Pakistan high and dry on a multitude of occasions; a sagacious course of action would be to not put all the eggs in one basket. It is an irony that the interests of a capitalist superpower supplant the well being of a region that may very hold the key to the recovery of the tarnished world economy. Coupled with the high cost the economy has to pay for the Afghan war in the form of reduced foreign investment, it’s always wiser to have a friend that may not equal America, but at least be good enough to fit neatly in the picture of a competitor.

For decades China’s constant increase in exports to Pakistan resulted in a persistent and growing trade imbalance. The main items of Pakistan’s imports from China are machinery and parts, iron and steel manufactures, sugar, chemical materials. The main items of Pakistan’s exports to China are cotton fabrics, cotton yarn, petroleum and its products. A comprehensive free trade agreement was signed in 2008, giving each country unprecedented market access to the other. Bilateral trade had reached around dollar 7 billion in 2008. The trade gap is in China’s favor owing to our narrow trade base. Almost around 80% of its exports consist of cotton yarn and fabric. This is a pervasive feature of our trade which serves to exemplify why the country has been mired in trade deficits.

In terms of economic policy, Pakistan has many lessons to learn from China. When the economic meltdown had enveloped the world economy in gloom, China was the only ray of hope. In light of these stark differences between China and the developed world, the ease with which China has been able to progress in the realm of economic development never ceases to amaze the world community. China has proved that a large supply of labor is not always an economic burden. Even the large amount of unskilled labor attracts multinational companies who set up plants in developing countries owing to the reduced cost of production and increased profit margins. This, in turn, means that Pakistan can capitalize on its vast human resources. Education holds the key to a productive labor force, one that is capable of changing the fate of nations. It is an irony that developed countries lack an abundant labor supply and have to rely on foreign workers to bridge the gap in the labor market. In the past, this factor has been condoned at our own peril. But this time, the price of not being able to act will be exorbitant and maybe more than the tarnished economy can bear.

A big hurdle in the way of increased trade relations with China is the present security condition of Pakistan. In these turbulent times, one cannot blame the Chinese investors for condoning our country. Trade has a strong correlation with business confidence and every time a bomb explodes, this feeling of insecurity takes hold. It is noteworthy that Chinese workers have been targeted by these radical elements. Another problem is that Pakistan’s most imports from China are value added; while more than 85 percent exports to China are raw materials, such as cotton yarn and fabric, chrome and copper ores. This serves to elucidate why the country has been mired in trade deficit for such a length of time.

It goes without saying that China is a crucial trading partner of Pakistan. Rapid economic development in China has caused increased demand for raw materials, components and development of cross-country production networks/processes. China is keen to improve the living standard of its rural denizens which culminates in increasing purchasing power in the form of increased demand for basic needs as well as luxury items. This presents an opportunity for the Pakistani exporters to reduce the trade deficit with our neighbor. The low priced imports however do help the local consumers and this even stands in the way of rising inflation. That being said, the low cost of Chinese goods virtually kills domestic competition as consumers act according to the law of demand. For many Pakistani manufacturers, competing with China is an exercise in futility. This is especially true in the manufacturing sector where China is the king. This means that Pakistan need to respond with alacrity if it is to harbor any hopes of survival in a world with the likes of China and India engendering a situation in which cost cutting becomes the blueprint for success in the trade market.

Abdul Samad
Georgetown University
School of Foreign Service in Qatar



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