CPEC: Advantage China as the Winner Takes It All

Chinese President Xi Jinping presides over an informal leaders' meeting of the BRICS in Hamburg, Germany (Xinhua/Ma Zhancheng)(mcg)

The China-Pakistan Economic Corridor (CPEC) will undoubtedly benefit China and its industry, Pakistan might end up losing both money and sovereignty in varying degrees….writes Dr Sakariya Kareem

Chinese President Xi Jinping presides over an informal leaders’ meeting of the BRICS in Hamburg, Germany (Xinhua/Ma Zhancheng)(mcg)

The China-Pakistan Economic Corridor (CPEC), hailed more in Pakistan than anywhere else, as the panacea for all the country’s ills, is turning out that perhaps Pakistan has chewed more than it can digest. While the project will undoubtedly benefit China and its industry, Pakistan might end up losing both money and sovereignty in varying degrees. It is gradually dawning on the Pakistani intelligentsia that the project is certainly not going to be all honey and milk as their leaders have been projecting. A well-known Pakistani economist, Kaiser Bengali, recently termed the CPEC project not as a Game Changer but as Game Over for Pakistan.

Since the project has been bandied about as an economic miracle, a reality check of its economic potential and benefits to the people of Pakistan becomes all the necessary. The most obvious impact would be on the manufacturing sector of Pakistan, which is not only a major employer but also revenue generator for the state in terms of taxes and other benefits to the economy. Besides the global economic slowdown, another factor which has caused serious concerns for the manufacturing sector has been the Afghan transit trade. A large part of goods from the Afghan transit trade, transiting through the Karachi Port, gets illegally offloaded in Pakistan and sold in the market. These tax free products are cheaper than the local products and hence retain an upper hand in the market. This, according to Pakistani economists, have forced many local industries to shut down.

A similar scenario would play out when the CPEC project becomes active. The simple fact that the Gwadar-Kashgar transit corridor would carry a larger volume of goods, with a heavier price tag, from China raises even more serious concerns about its impact on the local industries. It is estimated that even one per cent of diversions from the traffic would prove to be disastrous for the Pakistani industry. This could prove an early death knell for small and medium industrial units and heavy losses for bigger industries. It would also mean heavy losses to the state exchequer.

Some of the attendees take group photos during the China-Pakistan Economic Corridor (CPEC) Summit and Expo in Islamabad, Pakistan (Xinhua/Liu Tian) ****Authorized by ytfs****

Another impact would be the manner in which the local industries would be forced to become suppliers or resellers of Chinese or other foreign products. According to Business Recorder, a Pakistani economic newspaper,  the CPEC “may force local manufacturers in the long run to limit their business activities and confine it only to trading ie, buy from Chinese-established industries and sell it in the local market at a margin. The resulting in elimination of existing local manufacturing unit and leave Pakistan dependent on foreign-funded industries which eventually will repatriate profits to their own countries in the form of dividends, management fees and transfer pricing.“

Mr Kaiser Bengali, a senior economist who has been an advisor to the chief minister of Balochistan, in a recent article and an interview in The News on Sunday, a Sunday supplement of well-known Pakistani English daily, The News, raised several questions about the project, mostly about its impact on the economic stability of the country. His argument was that given the absence of clarity and transparency on the part of the government about the project, doubts were inevitable.

For instance, he pointed out, he was not sure how tax exemptions to Chinese firms would benefit the country or the domestic industry. In fact, he points out “experience again shows that tax exemptions to industries or to regions have only created distortions, without benefitting the economy. With regard to CPEC, the sweeping tax exemptions being awarded to Chinese firms creates a highly damaging non-level and discriminatory playing field against Pakistani firms, with the potential to virtually eliminate the remaining locally owned manufacturing sector in the country.“

Mr Bengali points out another serious problematic area—expenditure on the security of the infrastructure and personnel associated with the CPEC. Pakistan is committed to provide maximum security on land and at sea and it has raised several dedicated military, para-military and police units which need to be financed. Now what is not clear is where will this money come from? Will it be provided by the Chinese or other stake holders or drawn from the exchequer. There is no clarity on this issue. And, if Pakistani people have to bear the cost, then it is possible that the revenues earned by Pakistan would not be enough to maintain this new security apparatus.

Like many critical issues, an important issue which has brushed under the carpet is that of water availability in Gwadar. One glib answer given to the people from the leaders is that dams will be constructed to ensure proper water supply. But dams store only available water and with erratic rains and the cycle of floods and draught in the region, it is difficult to see how water supply could be ensured through dams. Desalination is another option which has been suggested but it is costly to create infrastructure necessary for desalination and even more costlier to operate and maintain—approximately Rs 750 million every year. China has not shown any inclination to shoulder this burden which means Pakistan will have to bear the cost. Here again, if the cost of providing water is more than the revenue generated from the project—Pakistan gets nine percent of the revenue generated from Gwadar and 91 per cent goes to China– the CPEC is going to be a losing proposition for Pakistan and ultimately for its people.