What China wants from Pakistan?

By Khurram Hussain (09 Nov 23): WHAT China wants from Pakistan is the same as what China wants from every other country, which is to endlessly run a trade surplus in their favor. There might be a few specific things beyond this, such as Gwadar for instance, but those are marginal and nowhere near as central to Chinese designs in Pakistan and the rest of the world as we might imagine.

Just add up the numbers. Since 2010, Pakistan has run a cumulative trade deficit with China equal almost to $90 billion. This means capital worth $90bn has flowed from Pakistan to China against goods and services coming the other way.

The next big deficit region includes the oil-producing countries of the Gulf. With the US, in the same period, Pakistan ran a trade surplus of $34bn. With the UK, it ran a trade surplus of almost $12bn. For the EU, it is harder to give a figure because the State Bank does not report EU trade data as a region, and the member countries have changed over the decade, making it difficult to manually compute the cumulative trade for these years. But it is safe to assume that there is sizeable trade surplus here too.

The numbers paint a rather straightforward picture. Pakistan earns capital by participating in the economies of the US, UK and EU, and spends this capital in the economies of China and the oil-producing kingdoms of the Gulf. The interesting thing is, if you look at the decade between 2000 and 2010, China would not factor as the top country with which Pakistan ran a trade deficit. It attained that position post-2010, and cemented it further with the second China Pakistan Free Trade Agreement agreed  in 2019.

This is not unique to Pakistan. There are not many countries in the world that run a trade surplus with China. The single largest trade surplus that anyone ran with China last year, for example, was Taiwan, coming in at $156bn. Other countries that ran a trade surplus with China include Japan, South Korea, Malaysia, Indonesia, Brazil and a few others. By and large, the rest of the world runs a deficit. India, for example, ran a$100bn deficit with China last year alone.

The difference between them and us, however, is they can afford this deficit whereas we can`t. Another difference is that India has worked to safeguard its trade interests with China, for example, by eschewing a bilateral free trade deal with them, while pursuing these with others in Southeast Asia instead. Pakistan, on the other hand, has not only gone deeper into this loss-making relationship with China, but increased reliance on Chinese credit as well along the way. A report released by Aid Data, a research lab based in the College of William and Mary, provides some useful data.

Since 2000, China has committed $70bn to Pakistan in the form of development finance, including emergency lending for budgetary support. Of this, $56bn was committed in the post2013 period, when the Belt and Road Initiative (BRI) began. The report provides data on commitments only, not actual disbursements, but in some categories, it is easy to see how commitments would equal disbursements.

One of these categories is the general budget support. Of the $56bn committed by China to Pakistan in the post-BRI period, $16bn were for budget support. In the pre-BRI period, the years running from 2000 to 2012, budget support credits were $4.6bn.

Notice the trend? China begins extending more and more credit for budget support to Pakistan as the trade deficit grew. What is the purpose of these credits? To keep us in the game. So we can keep losing more and more to them with every passing year. Let`s emphasize something that should otherwise be obvious. China is doing nothing wrong here. This is, in fact, fairly normal trade policy for an emerging great power. All great powers have run a similar trajectory. They run trade surpluses with the rest of the world for prolonged periods, gathering more and more capital within their economy as the years pass. Then they become exporters of this capital to others.

Eventually, as their economy becomes the single largest producer of goods and services, as well as the single largest supplier of capital to the world, they remake the rules of the game to make their currency the medium of exchange in global trade settlements as well as the key reserve asset. China is walking this timeline, although it has hit some snags in graduating from the role of `workshop of the world` to the key financier of the world economy.

To repeat: China is doing nothing wrong, nothing sinister. This is normal trade policy for an emerging power, and its relationship with much of the world looks like this. It is Pakistan that has to learn something here. The first thing to do is to drain all emotion out of the relationship. This business of `higher than the highest mountain` needs to end. Second thing is to take stock of the two free trade agreements we have had with China thus far, and decide whether we want to renew this in 2024 or not, and if so, on what terms.

The most important thing is to realize that the game is all about earning capital, not borrowing it, not pulling it in with one-off fire sales of assets. Centre your relationships with all countries around this principle. Relationships that help you earn capital are to be built upon. Those that drain capital from you are to be reformed and changed. Build a foreign policy with this in mind. That is the only way the country can pull itself out from a cycle of endless borrowing.



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