Enhancing Agriculture Exports through Free Trade Agreement: A Case Study of CPFTA

Impact of Free Trade Agreement in Enhancing Agriculture Exports A Context of CPFTA The Federation of Pakistan Chambers of Commerce & Industry Policy Advisory Board

Outline Introduction Research Objectives Methodology Empirical Results Pakistan s Agriculture Export Potential Under Trade Agreements Utilization of CPFTA Tariffs Lines & Volume of Agriculture Exports Assessment of CPFTA Phase-II Conclusion Recommendations

Introduction China is becoming net importer for agriculture products. It mainly imports rice and fishes from Pakistan. Annual average growth rate of Pakistan s agricultural exports to the world: 7.3% (2003-2021). Annual average growth rate of Pakistan s agricultural exports to China: 20.2% (2003-2021).

Before CPFTA-I, Annual average growth rate of Pakistans agricultural exports to China: 13.5% (from 2003 to 2007). After CPFTA-I, Annual average growth rate of Pakistan s agricultural exports to China: 16.2% (from 2008 to 2018). Under CPFTA-1, only limited number of agriculture products were covered for tariff concession. The agreement of CPFTA-II in 2019 is expected to lead to some increase in Pakistan s exports.

Pakistans Agriculture Exports (2003-2021) 5,000 4,500 4,000 3,500 Million USD 3,000 CPFTA Phase-I 2,500 2,000 CPFTA Phase-II 1,500 1,000 500 - Pakistan's Exports to China Pakistan's Exports to world Source: ITC

Research Objectives To empirically examine the impact of FTA on Agriculture exports of Asian region. To empirically evaluate the impact of Exchange Rate Volatility on Agriculture exports of Asian region. To analyze potential of Pakistan s Agriculture export under Pak-China FTA (CPFTA), Pak- Malaysia FTA (MPCEPA), and Pak-Indonesia PTA. To assess the utilization of CPFTA.

Methodology This study employed the data of Asian countries from 2013 to 2020 for 2-digit level agriculture exports. ????????=???????????? ??? i=Importing Country, j= Partnering Country, p=Product Code & t=Time Model based on Gravity Approach ????????? = ??+ ??????????+ ??????????+ ?? ??????+ ??? Model based on Augmented Gravity Approach ??(????)???? = ???? ?????? + ???? ?????? + ???? ???? + ???? ????? +???????+ ???????+ ????????+ ???+ ?? Econometric technique of Poisson Pseudo Maximum Likelihood (PPML) ??????? = ??? {????(??????) + ????(??????) + ????(????) + ????(?????) + ???????+ ???????+ ????????+ ???+ ??}

Results 1% increase in partnering countries GDP, increases the Agriculture exports by 0.54%. 1% growth in reporting countries GDP increases the Agriculture exports by 0.55%. 1% increase in distance between reporting and partnering countries brings 1.14% decline in Agriculture exports. 1% growth in exchange rate volatility, declines the Agriculture exports by 0.23%. There is a greater possibility for reporting country to have relatively large Agriculture exports if Trading partners have a common border. Trading partners have an FTA. Estimated - Gravity Model Dependent Variable Independent Variable Coefficient Probability Exports Ln(GDPP) Ln(GDPR) Ln(D) Ln(EV) FTA CL BR C 0.54 0.55 -1.14 -0.23 1.11 -0.04 1.12 10.95 0.00 0.00 0.00 0.00 0.00 0.62 0.00 0.00 Fixed Effects Included

Pakistans Agriculture Export Potential Under Trade Agreements (Thousand USD) Product Code 02 06 09 07 14 04 08 05 13 12 China (CPFTA) 71,439 62,503 62,326 62,218 61,902 60,383 55,198 50,361 46,114 39,073 Indonesia (PTA) 11,902 15,678 3,153 10,678 3,150 5,089 13,481 5,791 16,098 2,424 Malaysia (MPCEPA) 13,756 17,119 6,440 43,134 7,110 7,104 16,136 16,902 16,848 6,484 Product Label Meat and edible meat offal. Live trees and other plants; Coffee, tea, mate and spices. Vegetables Vegetable plaiting materials; Dairy produce; birds' eggs; natural honey Fruits Products of animal origin Lac; gums, resins a Oil seeds and oleaginous fruit; Source: Author s Estimation

Key Findings Based on the current data estimation of gravity model Pakistan s Agriculture export potential to China is almost USD 600 million (2020). The possibility of potential with trading partner is greater if it has; Both common border and Free Trade Agreement (China), or Only has Free Trade Agreement (Malaysia). Relatively less potential with country not having both (Indonesia).

Utilization of CPFTA Tariffs Lines & Volume of Agriculture Exports 900,000 100 90 800,000 80 CPFTA Phase-I 700,000 CPFTA Phase-II 70 600,000 No. of Tariff Lines Thousand USD 60 500,000 50 400,000 40 300,000 30 200,000 20 100,000 10 - 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Volume of Agriculture Exports No. of Tariff Lines Used Source: ITC, MoC

Assessment of CPFTA Phase-II Pakistan's Agriculture Export to China (% Share) 2019 21.83% 11.24% 0% Pakistan's Agriculture Export to the World (US$ mn) China's Agriculture Import from the World (US$ mn) No. of Tariff Lines Category Share Category 2019 821.8 466.2 0.9 2021 1,034.50 415.6 0.3 2019 65,133.90 11,760.30 633.8 2021 88,130.50 13,938.10 808 2021 38.07% 1.74% 0% 188 316 15 22.84% 38.40% 1.82% A-0 A-10 A-5 152 18.47% C1 2.10% 1.84% 107.3 112.5 15,639.50 23,276.90 137 16.65% C2 62.93% 49.24% 2,751.20 2,564.10 5,988.90 15,682.70 10 1.22% MOP1 1.44% 1.48% 0.2 0 0.2 0.3 5 0.61% MOP2 0% 0% 0.7 0.3 181.9 182.9 - - N/A Grand Total 0.46% 7.63% - 304.2 4,166.80 4,215.60 823 100% 103,505 146,235 100% 100% 4,148.20 4,431.70 Source: PBS, ITC

CPFTA Phase- II Key Implication On average Pakistan s Agriculture Export has increased under CPFTA Phase I, The tariff lines usage has been fluctuating under the period of CPFTA Phase-I. Almost 71% of non-zero line with duty of 0-10 will get 0 in 10 years under CPFTA Phase-II. Almost 77% of non-zero line with duty of 10-20 will not get any further reduction under CPFTA Phase-II. CPFTA Phase-I Status in CPFTA Phase- II MFN rates Preferential FTA Duty No. Tariff Lines 0.00 145 MFN>0 Remain Zero A-0=20,A-5=17, A-10=310, C1=86, MOP1=3 MFN>FT A duty 0-10 436 MFN>FT A duty A-0=9, A- 10=6,C1=75 10-20 97

Conclusion The Empirical results of gravity model indicates; FTA among trade partners in the region of Asia has positive impact on Agriculture Exports. Exchange Rate Volatility has negative impact on Agriculture Exports. Pakistan has relatively large agriculture export potential with countries having common border and agriculture-based FTA i.e., China. Under CPFTA Phase I; Overall Agriculture Exports to China has increased under diversified Tariff Lines.

Under CPFTA Phase II; 71% of tariff lines with 0-10% duty in CPFTA-I, will be 0 in ten years under CPFTA-II. 77% of non-zero line with duty of 10-20 have not gotten any further reduction under CPFTA Phase-II. Drastic increase in agriculture exports in 2021 (Post Pandemic Year). A-0 category s share has shown an increase in share of almost 50% (from 21% to 38%) Rigorous Non-Tariff Barriers are limiting the extend of Pakistan's Potential export to China.

Recommendations Agriculture based Free Trade Agreement Utilize the existing FTA more efficiently (especially CPFTA) Negotiation and Management of Non-Tariff Measures Pandemic creates a serious threat for Pakistan-China trade due to increased NTMs/NTBs. A negotiation of management of these measures can boost the export immensely. Management of Exchange Rate Volatility Exchange rate volatility management with managed float system.

Provision of Cold Chains (Fruits and Vegetables) China is a potential market for Pakistan for agriculture products due to their perishability. Building of Cold Storage Chains to all external exit (Border and Ports). An Organized Commodity Market A well-organized commodity market on national level for agriculture products can boost Pakistan s Agriculture exports. Better Ways for Generating Trade Leads Commercial Consulates on both sides should conduct market research. Increase number of trade fairs, virtual expos, and other marketing strategies

Standard Requirements Agriculture products have higher standard requirements in international markets. The awareness of China specific requirement of Agriculture products to exporters. Better Demand-Supply Match Import of seeds for internationally demanded (especially China) Fruits and Vegetables should be made to increase the volume of trade. Quota on Cereals Quota on cereals such as rice needs to be increased. Enhancement of Fisheries Sector Tax concession and R&D support should be provided to fisheries to increase the volume of trade, due to high demand. Assistance in registration of new marine products and reliable exporter in China.

Thank You The Federation of Pakistan Chambers of Commerce & Industry Policy Advisory Board Date: 30th June, 2022