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Citizen Voices Economy Governance

Trade And Investment Are Good; ‘Debt Traps’ Are Not

In today’s world, no country is self-sufficient. They depend on each other to meet their needs. International trade refers to an exchange of goods and services between the members of different states.

Why is trade essential? There are many rationales but the most important ones are; 1) the “non availability” of a certain product in a country, while it is available in another country. 2) the availability of a certain product in a country at “cheaper price” as compared to the other country. 3) The availability of a certain product of a “better quality” in a country as compared to the other country.

In theory, trade is good for every country due to more choices and cheaper goods. A country can also specialize in a particular commodity and will benefit from it. But if a developing or under-developed country, due to its weaker economy, will not be able to produce better quality and cheap products, then what does it do?

For this, a possible response is tarrifs on imports. The country will impose tariffs or taxes on imported goods, which, in turn, will be favourable for its domestic market.

So all in all, international trade is a two-tiered collaboration, which benefits both the exporting as well as the importing markets.

Trade and the economy are symmetrical to each other. Increase in exports leads to an increase in GDP per capita growth. Plainly, trade boosts economic growth and reduces global poverty.

The World Trade Organization (WTO) is an institution which regulates international trade between the nations. It replaced the General Agreement on Tariffs and Trade (GATT) in 1994 and has 164 member states. It promotes freer trade by requiring all its members to follow certain regulations and remove trade barriers.

Until the 1970s, China’s economy was managed through total state control and planning. It was kept closed vis-a-vis other economies. China joined the World Trade Organization in 2001. Some conditions were applied and China was urged to open up its economy for other countries. It promised to fulfill the conditions and liberalize its economy in the future for trade purposes. With the passage of time, few conditions were fulfilled but China has been seen as benefiting greatly from the WTO regardless.

China is the largest goods manufacturer and exporter in the world. It allows the export of its products very easily but not so for imports. We find “Made in China” products in almost every other country across the world but when the question is about imports, then China has strenuous conditions and restrictions in this matter. As a small example: the largest social media platforms in the world like YouTube, Google, Facebook etc are banned in China. It didn’t allow these companies to benefit from the largest market in the world. As mentioned above, trade is meant to be a two-tiered collaboration but China has not always lived up to that.

A related phenomenon in China is “cloning” of products – essentially copycat items. Today, China’s YouTube is Youku, its Google is Baidu and its Facebook is Weibo. The intellectual property protection system in China allows firms from that country to do what those in other countries cannot easily get away with. For example, if a company in UK stole the idea or concept of a company in US, then the US company can file a case in British courts against the theft. China’s system does not allow for this sort of action. In fact, critics have accused Chinese authorities of being complicit in this process. They have been accused of demanding that foreign companies forfeit their technology to them, if they want to do business with China.

Another aspect of Chinese participation in global trade is the practice of “dumping” goods at impossibly low prices for local producers to compete with. By using this technique, China gains a monopoly in many sectors of other countries. Dumping is also allegedly supported by the Chinese government, and it has even been accused of subsidizing dumping so as to gain market share abroad. In 2018, Pakistan imposed anti-dumping tariffs on Chinese products. According to reports, businessmen in Pakistan also raised their reservations against the dumping of Chinese goods under the China-Pakistan Economic Corridor (CPEC).

Australia has launched anti-dumping investigations against China. India is also planning to impose high tariffs (taxes) on Chinese aluminium foil, which it allegedly planned to dump in Indian markets. Furthermore, China has lost a dispute to European Union at the World Trade Organization due to its practice of steel dumping in European and Western countries. To protect their industries, EU countries imposed high tariffs on Chinese goods.

The “debt trap of China” is also a very famous trope by now, and many people would be acquainted with it. The criticism is that China constructs highways, dams, roads and initiates many infrastructural projects in poor countries. When these countries fail to repay their loans, then, it is alleged, China captures strategic locations of these countries. Zambia, an African country failed to repay the loan and it is in talks with China, which is likely to takeover Zesco, the state-owned national electricity company of that African country. China invested a huge amount of money in Kenya’s railway network, which this poor country failed to repay. As a result, the country is now at the risk of losing the port of Mombasa to China. Nigeria has taken many loans from China to fund different projects. It has until around 2038 to pay China back: otherwise a similar fate may be awaiting in the future.

China gave loans for the construction of Hambantota Port to Sri Lanka on high interest rates. Sri Lanka failed to pay on time and it resulted in the loss of the port from Sri Lankan hands. And so, Sri Lanka gave the Hambantota Port to China on lease for 99 years in lieu of payment. Allegedly, the Maldives and the Philippines also have apprehensions around China’s “debt trap” – including the billions of dollars offered to them under the One Belt One Road (OBOR) project.

OBOR includes six corridors. The China-Pakistan Economic Corridor (CPEC) is one of them. The purpose of Belt and Road initiative (BRI) is to promote economic development and intercontinental connectivity. And this is a laudable goal.

But China’s alleged debt trap diplomacy shouldn’t be ignored. This road network will connect almost 60 countries with each other and it is only natural that China will exercise a decisive influence due to its trillions of dollars of investment.

CPEC is a collection of many infrastructure projects, and includes investments in roads, railway, energy sector, agriculture, science and technology, the Gwadar Port Complex, special economic zones and many other areas. These huge projects are likely to create 2.3 million jobs. But Pakistan has to centre its own interests as it participates in CPEC.

Reservations and qualms regarding various CPEC projects were also echoed by many economists and experts in Pakistan. And so, Pakistan should take another, careful look at any projects agreed to under unfavourable conditions.


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Naya Daur