SINO-PAK ECONOMIC RELATIONS: THE

CHALLENGES AND LESSONS FOR PAKISTAN

Khawaja AbdulHaq
Karachi, Pakistan

A Dissertation (or Thesis)

In E-Commerce presented to the Graduate Faculty of South China
University of Technology in partial fulfillment of the Requirements for
the Degree of Bachelor of International Economics and trade

2015
Supervisor of Dissertation
Jing Nan, Associate Professor, School of Economics and Commerce

School of International Education

 Acknowledgements

First of all I am grateful my parents for supporting me for all these four years in the

university. Their support made my journey much easier. Second I would like to thank my

supervisor Ms. Jing Nan for her guidance which enabled me to write this thesis

completely.

I would also like to thank my friends Zulfiqar Raza and Kevin Suwandi for giving

me useful tips and suggestions to make it most of my dissertation.

Last but not least I would like to thank all of my professors in South China University for

all their hard work to give me best possible education, without their outstanding

teaching, it would be hard road for me until this point.

II
 Abstract

SINO-PAK ECONOMIC RELATIONS: THE CHALLENGES AND LESSONS FOR

PAKISTAN

Khawaja AbdulHaq

Pakistan and China have enjoyed good relations since 1951 and have been proven best

allies to each other on countless occasions, while at the same time accomplishing many

strategic projects to benefit both the countries. China have invested in sectors like defense,

energy, agriculture. In the past, China-Pakistan ties were mainly of military and strategic

importance but now the economic relations of China-Pakistan are strengthening specially

after the Free Trade Agreement in 2007. In this paper we will look at the difference

between trading before and after FTA (Free trade Agreement), and how mutually

beneficial it is for both countries. Also highlighting China’s strategic investments to reach

full potential of this trading with Pakistan and other countries. Also mentioning the

challenges Pakistan face due to this relation and how to counter them with possible

solution. This paper also spotlights the important lessons on what Pakistan can learn from

China to prosper economically and also the future prospects for upcoming cooperating

projects between both countries.

Key words: Pakistan, China, Economic, Strategic, Challenges, lessons, Future

III
 Table of Contents

Chapter 1: Introduction……………………………………………….…….…………1
1.1 Background……………………………………………….….………..1
1.2 Problem statement……………………………………….…….………2
Chapter 2: Overview of Economic Relations…………………………….……………3
2.1 Brief history……………………………………………...…………….3
2.2 Pakistan and China trade relation……………………..…….…………4
2.2.1 The Free Trade Agreement (FTA)…….………..….……………6
2.2.2 Sino-Pak FTA review...…………………………...…….……….8
2.3 China’s Strategic Investment……………………...…...….…………..14
2.3.1 Karakoram Highway……………………...…………….………15
2.3.2 Gwadar Port ……………………………...…….………....……16
2.4 Defense Cooperation………………………...………...………………19
2.4.1 Arms Trade……………………………...……....……...……….21
2.4.2 Counter-terrorism cooperation………..………....………………23
Chapter 3: Challenges for Pakistan……………………………..………..…………….25
3.1 Sino-Pak: Alliance risks………………………………………………..25
3.2 One-sided Free Trade Agreement……………….…………,...………..30
Chapter 4: Lessons for Pakistan and Future Prospects……...……….……...…………34
4.1 Lesson from economic development of China……….…......…………34
4.2 Prospects for new phase of collaboration ……………........…………..38
Chapter 5: Conclusion……………………………………………………...………….43
References…………………………………………………………………………...…45

IV
 List of Tables

Table 2.1 Pakistan trade with China before FTA………………………………......…..7

Table 2.2 Pakistan trade with China after FTA………………………………...………7

Table 2.3 Structure of Pakistan export to China………………………………..………9

Table 2.4 Pakistan Import from China………………………………………………... 11

V
 List of Figures

Figure 2.1 Pakistan trade with China………………………………………………….13

Figure 2.2 Pakistan–China trade report comparison………………………….………14

Figure 2.3 Sector-wise Chinese investment…………………………..………………15

Figure 3.1 Pakistan GDP Growth Rate……………………………………………….28

Figure 4.1 China GDP growth………………………………………….…………….35

Figure 4.2 Gross saving of Pakistan and China……………………………………….36

Figure 4.3 Demand and supply of electricity on Pakistan…………….………………39

VI
Chapter 1: Introduction

As we all know there are no permanent friends and enemies in international relations.

The permanent thing is the national interest which depends upon the international or

regional situation. China and Pakistan have relations since 1951, with these more than

60 years of diplomatic ties, both of these countries have observed high profile state

visits, billion dollars’ worth of economic deals, joint cooperative projects as well as

military to military training.

1.1 Background

China view Pakistan with strategically unique and important geography. China believes

the strategic position of Pakistan can get a China shortest route to the Persian Gulf and

Gulf of Aden, which can improve economic stability in the Xinjiang province of China,

as its shares border with Pakistan. The bond between two countries is strategic and many

areas of cooperation have been established in favor of both countries like Gwadar port

and Karakorum highway.

Both countries are giving much importance to strengthen their economic relations. Chinese

investment in Pakistan is gradually increasing in the public sector, which is very important

for economic development. Pakistan is the first country which has an FTA

1
(Free Trade Agreement) with China. Both states cooperate with each other in the field of

trade, economic, technology, communication, industry, energy and agriculture sectors.

China shares tight military relations with Pakistan and transfers latest equipment to

Pakistan defense forces. They are committed to fight against terrorism, separatism and

religious extremism, which is necessary for the stability, peace, progress and prosperity

of the region.

1.2 Problem Statement

The Chapter 3 highlights the challenges faced by the alliance as Pakistan becomes a risk

for investments due to the terrorism and other various threats. Secondly, FTA even

though mutually beneficial but being heavily one-sided. It analyses the challenges and

contradictions of the relationship with the possible solution to overcome them.

Pakistan is far behind China, at least economically wise, Chapter 4 discusses the

approach China took to face its economic problems and what Pakistan can learn from it

to solve its economic crisis. This chapter also Includes the future prospect of this

relationship pointing out upcoming cooperative project mainly regarding the energy

sector, which is currently the main crisis in Pakistan.

2
Chapter 2: Overview of Economic Relation

Pakistan and China are giving much importance to their mutual relations in their

foreign policy. China always gives defense and economic assistance to Pakistan. In

Pakistan, there is huge Chinese investment which is likely to invest in the development

of infrastructure, roads, highway, ports, and energy and communications sectors.

Pakistan welcomed the Chinese investment for social and economic development.

China also supported Pakistan role against terrorism in this region. Both states are

giving much importance to strengthen their economic relations. Chinese investment in

Pakistan is gradually increasing which is very important for economic development.

2.1 Brief History

Pakistan become independent state on 14th August 1947 being under the British colony.

India was partitioned into three parts one West Pakistan, East Pakistan (now Bangladesh)

and the largest part remained to be called India. On the other hand People’s Republic of

China was found on 1st October in 1949. Pakistan recognized China in 1950 and

Pakistan was the first Islamic and third non-communist country to recognize China. The

diplomatic relations between China and Pakistan began in 1951 and they were further

improved in 1961 when Pakistan voted in favor of China’s right in the UN.

3
China-Pakistan signed the agreement for settling the border issues in 1963 and also

constructed link between China’s Xinjian region and northern areas of Pakistan. China’s

diplomatic assistance during the Indo-Pakistan War of 1965, further improved the China-

Pakistan relationship. Afterwards the state visits by different leaders from both sides kept

on improving the mutual ties especially in 1996, when Chinese President Jiang Zemin

visited Pakistan helping to build a comprehensive friendship. In 2005, China and Pakistan

signed a landmark Treaty of Friendship and Co-operation.

Though Pak-China political ties were very strong but the economic relations were not

deep enough so in this regard China-Pakistan Free Trade Agreement (FTA) was

introduced as a stepping stone in augmenting the economic relations between China

and Pakistan. China-Pakistan FTA was signed on 2006 but came in action in 2007. The

Agreement consisted of phased and gradual program of elimination of tariff on

substantially all bilateral trade. Through mutual efforts, the bilateral trade of goods

between China and Pakistan reached 15 Billion US Dollars in 2011.

2.2 Pakistan & China Trade Relations

China is Pakistan’s major importer goods, Sino-Pak trade is presently 20% higher than

US–Pakistani trade. It was only in the late 1990 that the total value of Pak-China two-way

commerce began to shoot upward, expanding from less than $1 billion in 1998 to $2.4

billion in 2002, then to nearly $7 billion in 2007. This growth was sparked by the

4
2006 visit of Hu Jintao to Pakistan, when a free trade agreement (FTA) was established,

directed at raising the value of trade between the two countries and promote exports of

Pakistani agricultural produce to China. Bilateral trade registered an overall growth of

22%, rising to $10.6 billion in 2011 from $8.7 billion in 2010. However, the level of

bilateral trade is still fairly low for a number of reasons like unstable government and

terrorism also including Pakistan’s limited range of commodities for export. China

intends on exporting cheap goods to Pakistan.

On the whole, the FTA has benefited China more as the Pakistan’s exports are unable to

compete in the Chinese market. Pakistan mainly exports textiles and cotton to China

but the relative advantage it had in producing finished textiles has now been taken over

by the Chinese factories as they are able to produce finished goods at a lower price.

China’s economic interest in Pakistan depends on having influence to secure the ‘energy-

trade’ corridor through Pakistan from Xinjiang to Gwadar port. Achieving the full

potential of Gwadar depends on the Pakistani government being able to provide security

in Baluchistan, Pakistan’s internal security problem pose serious questions to the

relationship. This effects the prospect of the energy-trade corridor becoming a reality in

the near future.

5
2.2.1 Free Trade Agreement (FTA)

The real economic commitment between China and Pakistan started to begin in 2003 with

the establishment of bilateral Preferential Trade Agreement (PTA). Thereafter, a Joint

practicability Study for a bilateral FTA was conducted and at the same time an Agreement

on an Early Harvest Program (EHP) of the FTA was also negotiated in 2005 as determined

by Commerce Ministry of China and Pakistan. Concurrently negotiations on a

comprehensive bilateral Free Trade Agreement progressed, In spite of all the

complications, the negotiations were achieved in five Rounds of discussions in November,

2006 at Beijing.

The China-Pakistan Free Trade Agreement covers Trade in the investment as well as

goods. Pakistan was the first country which had the attributes of Investment in the FTAs

being introduced and put in action by China up to that time. The Agreement was revealed

to the WTO on 18 January 2008 under Article XXIV: 7(a) of GATT 1994. For both the

countries tariff reductions for the first phase were completed at 1 January 2012. Both

countries agreed to review and alter the tariff reduction modalities in every five years.

The FTA between China and Pakistan would open new opportunities for the investors of

both the countries. The bilateral FTA will encourage the two countries to fully take

advantage of each other’s comparative advantages and achieve the cooperation potentials

up to the maximum. Pakistan will be welcoming Chinese Foreign Direct Investment in

form of electrical and non-electrical machinery, electronics, automobiles, textile,

6
engineering, fruits, vegetables, seafood and livestock products. Pakistani firms also

need to fully discover the opportunities being presented by the Free Trade Agreement.

Therefore, China and Pakistan should eagerly promote investment facilitation and

explore new forms of investment cooperation. In the graph and table shown below we

can notice the difference in trading quantity before and after FTA.

Table 2.1 Pakistan bilateral trade with China before FTA (in US million $)

Years Exports Imports

1999 180.72 446.76
2000 244.64 550.11
2001 289.38 487.02
2002 236.37 698.54
2003 259.64 957.33
2004 300.58 1,488.77
2005 435.68 2,349.39
Source: Din, Ghani and Qadir

Table 2.2 Pakistan bilateral trade with China after FTA(in million dollars)

2006 2007 2008 2009 2010 2011 2012

Imports 2915 4164 4738 3780 5248 6471 6688
from China
% of total 10% 13% 11% 12% 14% 15% 16%
Import
from world
Exports to 507 614 727 998 1436 1679 2620
China
% of total 3% 3% 4% 6% 7% 7% 11%
exports to
world
Source: University of Punjab

7
2.2.2 Sino-Pak FTA Review

nd
China is world’s fastest growing economy for many years, it is now the world’s 2 largest

economy, the largest exporter, and the second largest importer of goods. China’s overall

trade was about USD 3 trillion in 2010, with exports and imports of USD 1.6 trillion and

1.4 trillion, respectively. China’s foreign direct investment (FDI) has also shown a

significant increase in these recent years it was USD 68 billion in 2010.

Even though Pakistan’s aggregate exports to China have increased rapidly, we needs to

look at the table 2.2 of exports to fully understand the direction of this change. However,

review of the table 2.3 tell us two major points. First, the export structure in 2010 is not

satisfactory, with raw materials and primary manufactures such as a cotton yarn, cotton

fiber and chromium ores responsible for almost two thirds of total exports. Second, this

structure has not changed much in the last decade, it is been the same six commodities

for over 80 percent of exports in 2000 and 2010. However, over the ten years, the shares

of cotton yarn and chromium ores have increased at the cost of cotton fabrics, a change

that most would see as a move backward.

8
Table 2.3: Structure of Pakistan export to China in the Period of 2000 and 2010

No. Commodity USD Million % Share USD Million % Share

(2000) (2000) (2010) (2010)

1 Cotton yarn, excel. 100.0 40.9 737.3 51.3

thread
2 Chromium ores and 4.5 1.8 137.6 9.6

concentrates
3 Cotton fabrics, 56.5 23.1 99.6 6.9
woven
4 Textile fabrics: 10.7 4.4 75.9 5.3
cotton
5 Fish, crustaceans, 15.3 6.3 67.5 4.7
mollusks
6 Leather 15.9 6.5 46.0 3.2

7 Machinery and 0.8 0.3 45.4 3.2

transport equip
8 Plastic in primary 2.5 1.0 38.2 2.7
form
Total Export to 244.6 1435.9

China
Source: United Nations Statistics Division, UN Comtrade

Pakistan’s top imports from the world come largely from China with the exception of oil.

If we look at the market shares in Table 2.2, China’s access into Pakistan’s markets for

manufactured products has increased since 2006. Products such as electrical and

9
electronic equipment, fertilizers, man-made filaments, articles of iron and steel and

footwear, with the exception of vegetable fats, where most imports are from Malaysia,

China is prime supplier for most of these goods and has gained significant access into

Pakistan’s markets. While Pakistani products have seen difficulties in attaining access

into Chinese market, imports from China have performed consistently well in

Pakistani market as evidenced here.

Trade with China has increased by 172% from 2006 but a significant volume of this trade

can be attributed to large imports of electric and electronic equipment, machinery,

chemicals, fertilizers and industrial raw materials (staple fibers, plastics, iron and steel).

Given the difference in the size of the two economies (Pakistan’s GDP is 0.2% of China’s

GDP that presently holds on to be 9.2 trillion dollars), gains of trade for a developing

country like Pakistan are achieved via cheaper raw material and machinery for local

production, that China has readily provided.

Post- FTA figures do indicate encouraging growth patterns in exports. Pakistan’s exports

to China saw an increase of 233% from 2006 and 2011. In the last fiscal year, exports

witnessed a growth of 60% increasing by 1 billion dollars in one year.

Pakistan has also seen a smooth inflow of imports from China with Chinese companies

making a significant contribution to imports from world. China contributes to more than

1/4th of Pakistan’s imports. After the FTA, China climbed in position from 4th top

supplier to the 2nd. China was Pakistan’s main source for imports in 2007 and 2009.

10
 Table 2.4 Pakistan Import from China (2006 and 2012)

2006 2012
Imports Imports % Imports Imports %
Products from from share from from share
China world China world
Electrical, electronic equipment 568 3,081 18% 1,741 2,752 63%

Machinery, nuclear reactors, 691 3,344 21% 869 3,060 28%

boilers, etc
Organic chemicals 127 1,178 11% 374 2,038 18%
Manmade filaments 137 313 44% 373 530 70%
Iron and steel 130 1,393 9% 358 1,848 19%
Fertilizers 2 452 0% 340 908 37%
Plastics and articles thereof 86 1,129 8% 203 1,501 14%

Articles of iron or steel 77 428 18% 181 409 44%

Vehicles other than railway, 79 1,733 5% 179 1,596 11%
tramway
Manmade staple fibres 21 285 7% 177 539 33%
Rubber and articles thereof 82 312 26% 158 464 34%

Miscellaneous chemical products 72 374 19% 117 549 21%

Inorganic chemicals, precious 59 238 25% 109 498 22%

metal compound, isotopes

Railway, tramway locomotives, 30 37 80% 104 110 95%

rolling stock, equipment

11
Tanning, dyeing extracts, tannins, 49 233 21% 94 321 29%
derivs, pigments etc

Paper and paperboard, articles of 32 361 9% 82 457 18%

pulp, paper and board

Optical, photo, technical, medical, 37 378 10% 82 453 18%

etc apparatus
Cotton 5 429 1% 76 684 11%
Footwear, gaiters and the like, 18 23 78% 69 80 86%
parts thereof
Source: China ministry of commerce

Even though exports have increased following the FTA (30% year-on-year average), the

provisions of the FTA appear to have benefitted China more. China is primary supplier

for most top import products for Pakistan. The growing trade gap presents a potential

risk for a worsening trade deficit that may be a reflection of lowering or stagnant levels

of local production given the similar product composition of the two countries.

12
 Figure 2.1 Pakistan trade with China 1996-2013

Source: United Nations Commodity Trade Statistics Database and Calculations

China share in Pakistan’s total imports has increased from less than 5 percent to over 14

percent during this period. That is not a surprise since China’s exports to the rest of the

world have also grown significantly, but due to Pakistan’s security dependence on China,

the government tends avoid the violations on imports from China because of this there is

an an opportunity for complicity between dishonest Pakistani importers and Chinese

exporters to misclassify imports from China and lessen their value to evade import duties

and taxes. Due to this the actual increase in imports has been even greater than that

indicated by official figures.

Although there is no way to calculate the full extent of tax evasion, but to get a rough

idea of the undervaluation by comparing the value of “imports from China” stated by

Pakistan and “exports to Pakistan” stated by China in the UN Comtrade dataset. Exports

stated by China exceeded imports stated by Pakistan by 32 percent in 2010 (Figure 2.2).

13
 Figure 2.2 Pakistan–China trade report comparison (USD million)

Source: Pakistan Bureau of Statistics

2.3 China’s strategic Investment

The Chinese investment in Pakistan is focused at the public sector and is estimated to be

worth billions of dollars. In 2012 China and Pakistan carried out 36 projects worth $14

billion for the next five years under the Five Year Development Program for Trade and

Economic Cooperation. But mostly these investments are not direct cash transfers,

which makes actual amount unknown, which has so far aimed at public-sector financing

and assistance in engineering and scientific research and development. 2015 was the

year where Chinese direct investments to Pakistan reached $46 billion, China is steering

towards the strategic sectors where state involvement is important, sectors like space

14
programs, telecommunications, electronic products, energy, defense, nuclear energy and

transportation.

Figure 2.3 Sector-wise Chinese investment from 2012-2013 (In million US $ )

Source: Pakistan Economic Survey

2.3.1 Karakoram Highway

The Karakoram Highway was completed in 1986, it connects China’s western regions to

Pakistan. The Highway is a symbol of Pakistan-China Cooperation and it took ten years

to get completed. The Highway is marvelous achievement of engineering and an

enduring monument to the 810 Pakistanis and 82 Chinese who lost their lives during

construction work due to the unstable terrain.

15
Border at Khunjerab was opened for travel and business by 1986. The road has triggered

the commercial activity between Pakistan and China. It has also added an inexpensive

and convenient way to form contact between Pakistani and Chinese people who for many

years were isolated by a dangerous terrain. Karakoram Highway has a strategic

importance, not only It connects Pakistan and China, Karakoram highway can also serve

as a link between China and the Central Asian states. By this route Chinese silk, furs,

spices Ceramics, lacquer ware bronze and iron travelled to the West, while the silver,

precious and semi-precious stones, wool, linen, ivory, gold, asbestos and glass of south

Asia and the West, travel East.

2.3.2 Gwadar Port

Baluchistan is the biggest province of Pakistan and is rich in natural resources. Its border

is shared with with Iran and Afghanistan. Baluchistan has an important district called

Gwadar, which situated is at the mouth of Persian Gulf near Strait of Hormuz (major

world trading route). Gwadar is located at Arabic sea which is only 32 km from Oman and

72 km from Iran and it is linked with Persian Gulf. Pakistan bought Gwadar port from

Oman in 1958. Pakistan declared Gwadar as Gwadar port in 1964. First phase of Gwadar

port construction and development started in 2001, with the cooperation of China. In

2002, China set the foundation of Gwadar port.

16
Pakistan has insufficient strategic depth from east to west, Gwadar will raise this strategic

depth significantly, as a strategic port being further away from India. The additional

range of 460 Km away from India will minimize the vulnerability of Pakistan. Gwadar

will encourage Pakistan to monitor the Sea Lines of Communications (SLOCs) starting

from the Persian Gulf and bottle neck at Strait of Hormuz. Considering strategically,

Pakistan’s Naval Bases at Gwadar and Ormara, Chinese Naval assets presence, control of

Arabian Sea at Persian Gulf by U.S 5th Naval Fleet and Indian hope to emerge as a Blue

Water Navy will be checked. This will also provide Pak-China naval nexus to deny

maneuver space to Indian Navy in Indian Ocean.

According to Nixon (1992) Chinese naval presence at this critical choke point of Gulf can

not only check the INDO-US domination of Indian Ocean but it can also strive to achieve

its aim of being a naval power. Apart from the utilization of port an existing land link can

be of help to China in improving its ever expanding trade to Africa, Central Asia and

Middle East as it will reduce the sea distance to 2500 Km instead of 10,000 Km. Gwadar

gives China a tactical position in the energy rich Caspian Region thus, affording an

alternative trade route for the Xinjiang province, thus make use of it as a trade route

through Gwadar Deep Sea Port.

China has contributed assistance for the development of Gwadar Deep Sea Port to

Pakistan thus, strengthening the essential geo-strategic ties with each other. China is

17
likely to benefit from the Gwadar project numerous strategic and economic aspects of

Chinese interest in this project are explained below: -

a) The Gwadar port is very economical for the China especially for the development of

its south western Xinjiang Province. China gets an option to utilize the shortest approach

to the Persian Gulf and Gulf of Aden by only traversing 2500 Km on an existing Silk

Route. This path will also be taken as an economic opportunity for the struggling

Xinjiang people, which in turn can enhance the relations of neighboring Muslims from

two countries.

b) The Gwadar Port can serve China to observe the naval activities of USA in the Persian

Gulf 460 km further west of Karachi and away from Indian Naval Bases of Gujarat and

Mumbai. In the terms of military and strategy, Gwadar Port can help China to oversee the

SLOCs from the Persian Gulf as nearly 60% of Chinese energy requirements come from

the Persian Gulf and transit along this approach. Chinese naval presence is also likely to

improve Pakistan’s coastal defense.

As for Pakistan it can can fulfill its energy needs which are beyond its indigenous

production, furthermore it can also make number of advantages such as:

1. Boost trade with CARs / Middle East.

2. The relationships with bordering and regional countries can be enhanced

and trade can be improved.

18
 3. Pakistan can make lot of foreign exchange via transit fee and increase its foreign

exchange reserves.

4. The transit fee can be used for development purpose.

5. There will be a progressive development and progress in most of the

backward areas and towns and villages.

6. The living conditions and literacy rate of these areas can also be increased.

7. Lot of new jobs would be available because of the new projects which would

reduce the overall rate of unemployment.

It is anticipated that Gwadar city in future would likely turn into an international hub of

commercial and industrial activity, which would not only play a key role in the economic

development of Baluchistan, but also the whole country.

2.4 Defense Cooperation

The role of defense cooperation is generally used as a highly symbolic tool to signal

the strength of the relationship. China delivered 50 additional JF-17 fighter jets to

Pakistan after the death of Osama bin Laden, helped Pakistan in making its first native

built warship a month later and in 2011 China launched a communications satellite for

Pakistan.

19
For China the reason of improving military-to-military cooperation is to ensure the

progress of Pakistan’s domestic stability within China’s borders. Cooperation revolve

around counter-terrorism, joint exercises supply of weapons and intelligence-sharing,.

China and Pakistan conduct military exercises every two years and have tested their limit

to conduct operations from a joint-command center, including simulation of large-scale

intelligence gathering by Pakistani and Chinese troops. In November 2011 the two

armies carried out their joint exercises called Youyi-IV (meaning ‘friendship’), which

was intended to build intelligence-sharing and capacity for counter-terrorism.

Stronger military ties also help China withstand the instability that occur when Pakistan

lurches between democratic governments. Though Pakistan may not be able to provide

China with equipment or technology but the capacity for joint production, like with the

Sino-Pakistani JF-17 fighter means China can avoid the European Union embargo on

weapon sales to China. The extent of joint production has made uneasiness in India’s

security authorities as it is an efficient means of upgrading Pakistan’s military capacity

and capabilities.

China helped in building Pakistan’s nuclear weapon competence and civilian energy

program. China signed a civil-nuclear deal with Pakistan in 1986 and has afterwards

supplied it with two nuclear power plants. China ended support for Pakistan’s nuclear

weapons program after signing the Non-Proliferation Treaty in 1992, though the help is

widely known to have continued.

20
While it looks like cooperation heavily favors Chinese interests, official statements by

China supporting Pakistan’s fight against terrorism gives the latter the kind of political

support it desires and that is largely lacking from the international community. This was

most clearly illustrated by Chinese support for Pakistan after the US raid in May 2011

that killed bin Laden. Foreign Ministry spokeswoman Jiang Yu stated: ‘China will

continue staunchly supporting Pakistan developing and implementing its own anti-

terror strategy based on its own national conditions.

2.4.1 Arms Trade

China is the largest provider of military equipment to Pakistan; unlike Western countries,

China is unlikely to impose military sanctions on Pakistan. Military cooperation in both

conventional and non-conventional security is strengthening. The JF-17 combat aircraft is

the most notable piece of military hardware that is jointly produced. Pakistan also

purchases war ships and tank components from China and in recent years China has

supplied an increasing amount of counter-terrorism equipment, such as explosive

scanners, to Pakistan. Military cooperation between China and Pakistan started in the

1960s when China began supplying arms to Pakistan and established a number of arms

factories in Pakistan. The Karakorum Highway was justified as a means of allowing

China to provide military aid to Pakistan. Both of the countries supported anti-Soviet

fighters in Afghanistan during the 1980s. China’s cooperation was driven by concern

21
over India. From 1990, following the US imposition of sanctions on Pakistan, China

became Pakistan’s largest weapons supplier, and supplier of choice given Western history

of imposing sanctions on Pakistan.

In 1979, a few months after it was set up CATIC (China Aviation Technology Import-

Export Corporation) signed an agreement to export fighter planes to Pakistan. In 1986,

CATIC signed an agreement with Pakistan to jointly develop the K-8 jet trainer, and the

first six aircraft were delivered in 1994. The clearest example thus far of China-Pakistan

cooperation is the JF-17 fighter jet project (JF standing for joint fighter), the “flagship” of

the two countries partnership. The jointly-funded project was launched in 1999, when

CATIC signed a cooperation agreement with the Pakistan Air Force. Both countries

contributed half of the cost, estimated at US $150 million. The design for the plane was

finalized in 2001, and the maiden flight was held in 2003. The plane is part-built under

license in Pakistan. Pakistan eventually intends to induct around 150 JF-17s into its air

force, and as of February 2011, 22 planes were in service. India had placed pressure on

Russia not to sell engines to the joint fighter project, but after temporary refusing exports,

Russia finally agreed to provide the engines. The planes are to be armed with Chinese

missiles following France’s decision to refuse to sell missiles to Pakistan.

22
2.4.2 Counter terrorism Cooperation

China’s concern over its Muslim Uighur population became severe in the 1990s.

Following an Islamist uprising in the Chinese town of Baren in 1992, China closed

the Karakoram Highway for certain months, and in 1995 China hesitated to upgrade

the highway for fear that it would increase the spread of radical Islamist ideology.

Under pressure from China, Pakistan took a less tolerant approach to its own Uighur

people, banning settlements in Pakistan and arresting and deporting Uighurs.

China’s security cooperation with Pakistan has strengthen since 9/11. China expanded its

counterterrorism cooperation as a means of breaking links between Uighur separatists

and Pakistan-based militant groups. It has also attempted to try to gain support inside

Pakistan (also from religious parties) on the issue of Muslim separatism in Xinjiang. In

December 2001 General Pervez Musharraf, at the time “chief executive” of Pakistan,

visited Xi’an to address Chinese Muslims to be loyal to the Chinese government.

Pakistan’s army also took steps to crackdown on Uighurs based in Pakistan’s tribal areas

and send number of other Uighurs back to China.

Following the July 2009 riots in Xinjiang, Pakistan demonstrated its political value to

China, endorsing China’s methods and using its power to prevent the issue from being

raised at the Organization of the Islamic Conference. China’s counter-terrorism strategy

within Xinjiang involves a dialogue with the two main Islamic parties in Pakistan, the

Jamaat-e-Islami (JI) and the Jamaat-e-Ulema-e-Islami (JUI). The leaders of both parties

23
have travelled to China since 2009, at the invitation of the Communist Party of China

(CPC). Indian newspapers reported that the JI agreed not to support Islamist groups in

Xinjiang. The leaders of both parties continue to express their support for Sino-

Pakistan relations, and both parties have signed MoUs with the CPC.

24
Chapter 3: Challenges for the Pakistan

As China’s relation with Pakistan are reinforced by the rhetoric, it is clear that there are

also several challenges for the alliance. First, as Pakistan becomes more unstable China is

finding it more challenging to balance support for its ally with the criticism Pakistan

receives from the global community, mainly associated with the efforts to deal with the

spread of Islamic militancy and to make sure its nuclear weapons are safe. Second, the

Free Trade Agreement benefits China more than Pakistan. The regional aspects of South

Asia and the bilateral alliance structures mean both Pakistan and China have to cautiously

balance the narrative of their relationship with their strategic interests and rivalries.

3.1 Sino-Pak: Alliance risks

Pakistan’s geographical position is the main strategic importance to China. On the other

hand, the areas of economic and security cooperation demonstrate the limitations of

political goodwill between the two countries. A stable Pakistan favors China in securing

its national security interests in Xinjiang but Pakistan’s declining domestic traditional and

non-traditional security conditions have proven Islamabad’s own capacity to protect

Beijing’s interests and to contain the fallout of the volatility within its borders. The

present condition has revealed Islamabad’s limitations in terms of helping deliver

stability in Xinjiang and protecting Chinese investments and assets in Pakistan. As of

25
2012, there were 15,000 Chinese workers in Pakistan contributing to over 130 major

development projects.

Chinese workers have been targeted and even killed in Gwadar port in 2004, at the

Gomal Zam Dam in South of Waziristan in 2006 and in the Swat Area in 2007. Right

after these kinds of attacks a joint task force was setup in 2007 to guarantee the safety of

Chinese people in Pakistan.

As the security risks grow, Beijing has become more hesitant to invest in Pakistan despite

Islamabad’s attempts to convince it otherwise. It has so far held back on a commitment to

run Gwadar port because of the risky security environment in Baluchistan. As noted

above, the extraction of mineral deposits and the fruits of which are hardly ever seen by

the local Baluch population, is a point of contention between Baluch nationalists and the

central government in Islamabad. As a result, this conflict generally manifests itself in

attacks on Chinese personnel working on projects in the province. For example, in May

2004 three Chinese engineers were killed and nine wounded in a suicide attack on their

vehicle as they travelled to Gwadar. The Pakistani government reacted quickly by

deploying the Frontier Corps, a paramilitary force led by army officers, to escort the

engineers and six days later it had detained 18 suspects. This was followed by an attack

on Chinese engineers travelling in Baluchistan in November 2011, although none were

killed. Ultimately, realizing the full potential of Gwadar will depend upon the Pakistani

government stabilizing Baluchistan.

26
In September 2011, the privately owned China Kingho Group pulled out of a mining

project in Sindh worth $19 billion, apparently concerns over the protection of its

personnel following bombings in major cities. In July 2012, a bomb exploded outside the

Chinese Consulate in Karachi, which some observers linked to the discontent felt by

local nationalist Sindhi groups. In November 2012, a group of Chinese experts were

reportedly being harassed by local ‘unscrupulous elements’ and their equipment badly

damaged while carrying out seismic surveys in Sindh to assist with Pakistan’s crippling

energy crisis.

Nationalist groups in Sindh and Baluchistan, as well as the Tehreek-e-Taliban Pakistan,

see targeting Chinese investments as an effective means of attracting the immediate

attention of the Pakistani provincial and federal government. Having observed how

sensitive the government is in terms of responding to an attack on Chinese interests or to

any event that would destabilize relations, these non-state actors are employing the tactic

of attacking your enemy’s friend. However, these attacks remain small-scale and rare,

and they have therefore not had a discernible impact on current government policies

towards the stated grievances of these groups.

Pakistan pays a heavy price when it comes to economy, security and national resources

to deal with the war on terror and emerging security obstacles. In accordance to the

Economic Survey of Pakistan losses suffered by the country because of to the war on

27
terrorism in the outgoing fiscal year was at $6.7 billion to $3.3 billion or one-third less

than the previous year, showing a slow recovery.

Figure 3.1 Pakistan GDP Growth Rate 2000 to 2015

Source: Trade Economics

The year 2013-14 was the third consecutive year when there was a reduction in losses

compare to the preceding year as shown by the survey. This year’s losses also pushed the

total cost of the 13-year war above $102.5 billion, approximately two times more than

the government’s proposed total budget of Rs3.9 trillion for the year 2014-15.

According to Barth et al (2006), the greater the number of terrorist assaults per million

population, the lower the real GDP per capita growth and lower the capital formation as a

percentage of GDP. However Pakistan after joining the war against terror has become the

28
center of terrorist activities since 2002 which may have had negative impact on

the growth of GDP per capita and the physical development.

In addition to security risks, the excessive rate of drug-trafficking in the border locations

and the related health risks posed by boost in HIV has made a health security danger to

populations on each sides of the Sino-Pakistani border. Travelling of people for business

and trade bring wider health risks, as in October 2011 when ten polio cases were noted in

Xinjiang, the first in China since 1999. Pakistan has yet not successfully wiped out polio.

In August 2011 a huge stash of heroin was seized by authorities as drug-smugglers tried

to cross the border, and a month later in a separate incident a Pakistani citizen was

executed in China for drug-trafficking.

Pakistan is highly informed of the need to take care of and handle Chinese interests. This

is reflected in the value it places on the relationship via high-profile visits by government

and army personnel. On the other hand, in accordance to analysts China has privately

started to question Pakistan’s capability to deliver on China’s narrowly described

strategic interests in the region. China want to avoid becoming a target for militants,

particularly in Xinjiang, mainly because it would compromise its larger goals of

economic growth, domestic stability and energy security.

The incentive for Pakistan’s authorities to eliminate militant groups could depend on the

shifting power dynamics of regional alliances in South Asia. Lack of stability in Pakistan

hinders it from gaining from any possible regional economic cooperation with its

29
neighbors, for instance with regard to energy pipelines. It is also unproductive for its

relationship with China . To counter all these threat defensive cooperative training

exercises have been introduced (as mentioned in chapter 2.2.2) in hope to exterminate all

these risk and Pakistan and China alliance can achieve its full potential.

3.2 One-sided Free Trade of Agreement

As mentioned in chapter two, FTA does have a positive impact on both countries but it is

mainly one-sided. Table 2.2 which shows Pakistan’s import and export from year 2006 to

2012.

In order to achieve trade balance Pakistan should switch from exporting simple

manufactures and primary commodities to higher-value-added merchandise, if export

progress is to be maintained and exports are to bring about expanding employment and

GDP in the country. The FTA with China provide Pakistan an advantage over other

nations in a number of potentially high-growth products as it provides market access at

zero duty for home textiles, cotton fabrics, bed-linen, leather articles, sports products,

fruits along with vegetables and other goods.

Even so, in pretty much all these products, Pakistani exporters have failed to make

progress because of nontariff barriers. For instance, Pakistan is a main exporter of towels

and bed-linen to the US and Europe, but export products are negligible to China because

30
of government of China want to protect its own industry of that sector by banning its

import to support domestic suppliers. Pakistan needs to concentrate on having these

nontariff barriers removed in areas that are its main exports.

The main cause for low-level trade could be linked to non-complementarities of products

in each countries and the fact that China has been competing in almost all key industries

of Pakistan’s exportable goods.

This is due to Pakistan’s industry narrow perspective, which has continued to be based

onto established export countries such as the Western Europe and US. Pakistani exporters

barely made significant efforts either to broaden the base of exportable commodities or to

explore additional markets, mainly in East Asia, for boosting the quantity of their exports.

This mental obsession with the western markets, which brings comparatively high profit

margins, therefore turns into a non-innovative export strategy that has continuously been

weakening Pakistan’s export potential for Chinese markets. Furthermore, helping to make

the Pakistani private sector more innovative and pro-active is important to create any

tangible outcomes as without this, the country may quite possibly lose its current level of

trade to more aggressive and competitive market forces.

The quality and quantity of products also needs to be outlined. Pakistan’s exports to

China are focused generally on cotton yarn and cotton fabric however there is an growing

trend in the export of seafood and leather. This prospective can only be recognized by

upgrading the processing technologies and making internationally acceptable quality.

31
While the majority of Pakistan’s imports from China are value added, more than 85% of

its exports to China tend to be raw materials like cotton yarn and fabric, chrome and

copper ores. For example, copper and gold by Saindak Copper-Gold Project is exported

to China in semi-finished form and re-exported to Pakistan after adding value. Chrome

ore is exported to China in a raw form and China possesses the technology as well as

smeltering plants that can then add value to Pakistani chrome exports. Pakistan must add

value to its exportable raw materials and other commodities inside the country and this

can be in the shape of joint ventures with Chinese companies that have the technology

and means to do so.

Pakistan has a narrow base for exportable commodities and more than 75% of its exports

originate from four items, namely cotton, rice, leather and sports goods. Diversifying

items to make them acceptable and more appealing for the Chinese domestic market is

the sort of positive export policy that could improve the quantity of exports and rectify to

an extent the trade imbalance. It will not be possible for Pakistan to enhance its exports to

China without this step and it should seek Chinese investment for projects aimed at

export diversification.

In addition, Pakistan should seize the opportunity provided by China’s drive to accelerate

development in its western provinces. The Karakoram Highway provides the shortest

overland route to the sea for these provinces, and China has pointed out an interest in

improving the highway to handle heavy traffic. Granted that Pakistan were to prioritize

32
this project and handle the activity of Islamic militants crossing over into China, the

resulting transit trade through Pakistan could produce an incredible increase to economic

activity. It would bring in Chinese investment into the northern parts of Pakistan and

create possibilities for the export of Pakistani goods to western China.

33
Chapter 4: Lessons for Pakistan & Future

prospects

Sino-Pak relationship have its perks, Pakistan being underdeveloped compare to China

can learn a lot from this relationship. China faced kind of similar obstacle as Pakistan

as they both started off as poor countries but China in the time period of 30 decade turn

itself into successful state. On the other hand the future of this relationship seem to be

bright as ever as there are several cooperation projects along the road in the future

4.1 Lessons from economic development of China

China overtook Japan in 2010 as the second biggest economy in the world after the US

which still holds the first position. In accordance to the estimates given by the weekly

Economist, China is most likely to have a GDP of $11.6 trillion in nominal dollar terms

(about 15 percent of the world GDP) in this current year 2015 as against $ 18.3 trillion

for the US and $ 4.96 trillion for Japan. If the present trends are preserved, Chinese

economy will surpass the US in nominal dollar terms close to the year 2027. In terms

of purchasing power parity, China’s GDP surpassed that of the US previous year.

The wonders of China's fast economic growth began in 1979 after a revolutionary change

in its internal and external policies under the assistance of its great leader, Deng

34
Xiaoping. Pakistan’s leaders and policy makers should try to learn lessons from the

improvements in China’s policies which have raised its position to the second largest

economy in the world within the period of about 30 years. These lessons would be

helpful to Pakistan as it comes to grips with the problems of rapid economic

progress confronting it.

Figure 4.1 China GDP growth (in billions of US dollars)

Source: Trading economics

China has been investing and saving year after year around 50% of its GDP is for

economic development. China’s high amount of national savings also allowed it to rely

on its own resources for speeding up its economic growth rather than borrowing loans

from foreign countries and establishments.

35
 Figure 4.2 Gross saving (% GDP) of Pakistan and China 2005 to 2013

Source: The World Bank

Through comparison Pakistan’s national saving rate in accordance to our official figures,

was only 22% of its GDP in 2012 to 2013. This kind of low national saving rate shows

the obvious consumption of our elite including our corrupt political figures, senior

government servants belonging to both the military and civil sectors. A byproduct of our

high consumption rate is the country’s too much dependence on foreign loans for

achieving the demands of economic development.

China does not have religious leaders who use religion for political benefits and power.

China punished all the corrupt bureaucrats, tax evaders, politicians and generals so that no

one would carry on corruption. The military generals in China work together with the

36
civilian leadership for success of the country. Their police is not corrupt in any manner;

no one evades taxes in China and the list of such positives can go on and on.

Pakistan has everything to learn from China. It has to break its feudal mentality & set up.

It will need to drive its uneducated people away from false extremism teaching of Islam to

make the country free from any terrorism & violence. China developed to a large extent

by providing very cheap land, labor & great infrastructure to potential entrepreneur. It

opened up its doors wide for its enemy the USA in 1972. After that other countries like

Japan, Germany, and Korea followed & moved their industries to China. It should be clear

that for a country like Pakistan to stick to China's example and make economic relations

with India for economic success.

To maintain the national focus on the great goal of quick economic development, two

additional actions were taken by China. First, a policy decision was taken to defuse

tensions in relations with neighboring countries, especially the Soviet Union and India,

with the goal of reducing the threat of the outbreak of a big armed conflict and promoting

a peaceful neighborhood. Border talks were started with both of these countries with this

objective in mind. It was correctly calculated by the Chinese leadership that this low-risk

foreign policy would allow them to limit the military budget and spend most of the

national resources to the strategic goal of rapid economic growth. Pakistan can do the

same with India, which also a growing economy, to minimize the risk of having an armed

conflict and focus on economic development.

37
Overall the lessons of China’s economic development for Pakistan are evident enough.

We must give the high value to the task of rapid economic development to which

everything else must be less prioritized. Policies of self-reliance must be targeted by the

nation combined with a program of reforms to improve our economic management and

accelerate economic growth. Externally, Pakistan should go after low-risk and non-

adventurist foreign and security policies. The military expenses should be kept at the

minimum level possible consistent with the maintenance of a credible security obstacle.

4.2 Prospects for New Phase of collaboration

There are 22 key projects that China has opened up in Pakistan such as tank rebuilding

factory, aircraft rebuilding factory, machine tools, heavy mechanical complex, heavy

electrical complex, nuclear power plants, Gwadar port and Karakorum Highway.

Correspondingly there are more than 120 smaller Chinese projects and around 12,000 to

15,000 Chinese engineers and professionals are doing work in Pakistan on these types of

projects and even more are to arrive. In order to successfully channel this cooperation

nevertheless, it is very important to seriously synchronize these initiatives and build

proper industrial zones.

Second of all, the region is increasingly coming together in a ‘new regionalism’ driven by

economy and energy. President Xi Jinping stated the significance of this new regionalism and

the Central Asian Economic Past at Astana, Kazakhstan. There is currently a pipeline

38
from Myanmar to China and from Kazakhstan to China; new pipelines, roads and

infrastructure are also being developed with Turkmenistan, Afghanistan, Pakistan and

India, as well as there is of course the pending Iran-Pakistan pipeline as well.

However, Pakistan’s energy crisis is the most important problem for Pakistan at domestic

side. It seems to have negative influence on all sectors of economy.

Figure 4.3 Demand and supply of electricity on Pakistan (Kilowatt)

Source: Planning Commission

Regular power outages have led to a slowed economic growth and closure of business.

Numerous textile companies have been shifted to Bangladesh while growing

39
unemployment at home. To obtain investment in energy sector of Pakistan has been the

top priority of China, given the significance of renewable energy, China has a lead on the

renewable energy technologies from solar panels to wind turbines to the construction of

huge hydro-projects. Pakistan has significant renewable energy potential but this resource

potential has not been used fully due to resource limitations and politicization of projects

of national interests. Great consideration must be given to hydropower plants that

produce about 24 percent of the world’s electricity and provide more than one billion

population with power. Pakistan’s Indus River system solely offers 35,000 MW power

potential.

Trying to keep perspective of the ongoing hydro-power projects such as Kohala,

Bunji,Karot and Taunsa the future prospects for Pak-China cooperation in hydro-power

sector is well lit. Following the completion Bunji will produce 7100 MW electricity. The

government of Pakistan has signed contract with China for the construction of the dam

in 2009. After that Taunsa hydro-electric project in Punjab and Kohala hydro-power

project in district Muzaffarabad will chip in electricity production. Pakistan has been

presently facing more than 7,000 megawatts power shortage which may grow more but

the investment in hydro-power projects could add 10,000 MW to Pakistan’s main grid

over the following 10 years.

China has made experience in coal energy and almost 80% of its electricity comes from

coal. India is also producing 75% of its electricity by using coal though Pakistan is

40
generating only 0.3 percent electricity from coal. Pakistan is amongst quite a few

countries owning large coal reserves in the world and has potential to produce electricity

from coal. Pakistan has future to develop wind power as well. Apparently the wind

corridor in the coastal region of Sindh offers the capability to produce 50,000 MW

electricity and in our favor China is now the world’s largest maker of wind turbines.

Chinese firms are currently engaged in wind power project in Jhampir (Sindh),

furthermore new agreements have been signed to improve cooperation in solar power

projects in Pakistan.

Chief Ministers of Baluchistan and Punjab are also part of the delegation that signifies the

importance of the government to broaden the areas of cooperation. Chief Minister Punjab

is concerned regarding power shortage in Punjab and wants to improve energy

cooperation to address the power crisis. He also seeks infrastructure improvement projects

and introduction of modern transportation system for major cities of the province. The

presence of Chief Minister Baluchistan will remove the misconceptions and doubts about

the progress of Gwadar port that will give China accessibility to Arabian Sea and Strait of

Hormuz making it a gateway for oil transportation.

Another important step on Pakistani side should be the security of Chinese nationals

who have been dealing with dangers of targeted killings in Pakistan. Government of

Pakistan must guarantee their proper protection and security and provide them an ideal

work environment. There are already reports of the approval for assigning a division of

41
Pakistan Army's special security division for the protection of Chinese citizen employed

on various Chinese funded projects across Pakistan.

42
Chapter 5: Conclusion

This paper highlights the relation between Pakistan and China, spotlighting the

cooperation projects for economic prosperity and defense training. The future of this

relationship will be bright and prosperous as Sino-Pak economic relations are playing

an important role to attain their mutual concerns for the economic development by

bringing regional prosperity and development.

Pakistan’s geographical location is very important for China. On the other hand, China

has great strategic importance and economic opportunity for Pakistan, which

Karakorum highway and Gwadar port are great examples. Pakistan also needs China in

the field of defense, which led Pakistan to become one of the biggest importer of

Ammunition to China. JF-17 is also a primary example of Sino-Pak cooperation.

Traditionally it was considered that Pakistan needed China more than it needed Pakistan.

But now days, rapid changes in global scenario make both states essential to each other.

China has world’s second largest economy having great opportunities for Pakistan to take

advantage it. Chinese investment is playing an important role to support the Pakistan

weak economy, for example, FTA is becoming major cause of Pak-China trade volume to

gradually increases.

Sino-Pak alliance presents opportunity for both countries, but it also comes with

challenges, be it may minimum investment from China in the private sector, terrorism

43
threat or one-sided FTA. How these push and pull factors affect the alliance and China’s

ability to influence Pakistan on specific regional security issues depends upon Pakistan

delivering on China’s core interests. Many steps have been proposed to counter these

challenges, especially the terrorism threat that resulted it in military to military training

between both country’s army every two years.

Pakistan has a lot to learn from China when it comes to economics success. Be it may,

their economic policy our their stance towards their enemies. Pakistan has to follow

China’s step by maximizing their national saving for foreign investments and get on

good terms with India, if it wants to achieve economic prosperity.

The collaboration has entered a new phase in recent years with strengthening and

widening cooperation in multiple directions especially the energy sectors. The Sino-Pak

cooperation can be improved by implementing on long term integrated planning and

improving implementation mechanism to overcome the energy crisis.

44
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