Pakistan media has seemingly come to certain realisations about their country’s ‘all-weather friend’ China. An editorial in one of the country’s largest English newspapers Dawn has raised questions about the skewed nature of the close ties between the two countries. The article “What China wants from Pakistan” by Pakistani economist Khurram Husain sheds light on the mounting trade deficit and stark economic differences between the two neighbouring nuclear powers.
He stated that China seeks to maintain an unending trade surplus in its favour with Pakistan, just as they do with any other nation. “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.”
Gawadar Port is operated by China Overseas Port Holding Company (COPHC), a state-run Chinese firm. Its most important feature is its geographic position as a gateway between western China and the Indian Ocean and hence is an asset for the communist country.
Khurram Husain emphasised that Pakistan has had a total trade deficit of about $90 billion with China since 2010. “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.”
Furthermore, he examined the figures in relation to other Western powers and noted that during the same time frame, Pakistan had a $34 billion trade surplus with the United States. “With the UK (United Kingdom), it ran a trade surplus of almost $12bn. For the EU (European Union), 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 would be a sizeable trade surplus here too.”
He wrote that Pakistan gains capital through its participation in the US, UK, and EU economies and utilises the same to invest in the markets of China and oil-producing states of the Gulf.
He pointed out that the glaring economic disparity with China solidified itself after 2010. “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 to in 2019.
The agreement mentioned that China and Pakistan aim to reach US$15–20 billion in bilateral trade by the completion of the second phase. It was put into force on 1 January 2020, and will last until 2024.
The economist further added, “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.”
He also brought up India and conveyed that the country “ran a $100bn deficit with China last year alone” and also addressed the important distinction between Pakistan and other countries. “The difference between them and us, however, is they can afford this deficit whereas we can’t.”
Khurram Husain cited India and commented that another difference is that the country has pursued its commercial interests with other nations in Southeast Asia while forgoing a bilateral free trade agreement with China in order to protect its trade interests with its hostile neighbour. He reiterated, “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.”
He highlighted China’s $70 billion development finance commitment to Pakistan since 2000, which included emergency loans for budgetary assistance. “Of this, $56bn was committed in the post-2013 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.”
He added, “One of these categories is the general budget support. Of the $56 billion committed by China to Pakistan in the post-BRI period, $16 billion was for budget support. In the pre-BRI period, the years running from 2000 to 2012, budget support credits were $4.6 billion.”
He observed that China started giving Pakistan increasing amounts of credit for budgetary support as the trade gap widened. “What is the purpose of these credits,” he asked and answered, “To keep us in the game. So we can keep losing more and more to them with every passing year.”
However, he claimed that China is not doing anything wrong and alleged, “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.”
He added, “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, Khurram Husain argued, is following this path even though it has encountered certain obstacles on its journey from becoming the world’s “workshop” to becoming a major financier. He reaffirmed that he did not blame China and stated, “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.”
He called for an objective assessment of the relationship between the countries which is devoid of any emotion. “This business of ‘higher than the highest mountain’ needs to end. The 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.”
He noted that understanding that the goal of the game is to earn capital and not borrow it or bring it in with sporadic fire sales of assets is crucial. “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 of a cycle of endless borrowing.”
It is important to note that China is notorious for its debt-trap diplomacy. Debt-trap diplomacy is a term to describe an international financial relationship where a creditor country or institution extends debt to a borrowing nation partially, or solely, to increase the lender’s political leverage.
The creditor country is said to extend excessive credit to a debtor country with the intention of extracting economic or political concessions when the debtor country becomes unable to meet its repayment obligations. The conditions of the loans are often not publicized. The borrowed money commonly pays for contractors and materials sourced from the creditor country. The Chinese Communist Party (CCP) government lends and then leverages the debt burden of smaller countries for geopolitical ends.
India is also a major focal point in the relationship between China and Pakistan. China exploits Pakistan as a tool for its expansionist foreign policy, especially with regard to India, in exchange for monetary assistance while Pakistan under its doctrine of religious extremism tries to infiltrate terrorism on Indian soil.
