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China Pakistan Economic Corridor: A Negotiated Settlement

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A new paper by an American think tank dispels the commonly held perception that China bulldozes its terms of trade in the Belt and Road Initiative (BRI) projects and shows how the Chinese policymakers accommodate the political concerns of partners and take into account the local realities. Through CPEC, China has so far made an investment of $25 billion in Pakistan. 

We have been seeing the big-ticket announcements on China Pakistan Economic Corridor (CPEC) from time to time. There has been little work done to look deeper into working dynamics of the project and how the terms of trade are negotiated and settled.

Academics Katharine Adeney and Filippo Boni have been studying CPEC in depth for some time now and they have come up with a paper on “How Pakistan and China Negotiate”, published by the Carnegie Endowment for International Peace in May 2021. The authors have in detail examined the minutes of meetings of the Joint Cooperation Committee (JCC) of China and Pakistan on CPEC along with consulting other key primary and secondary sources. We are basing today’s article on that above-mentioned paper.

The upshot of the paper is that CPEC is a negotiated settlement for the infrastructure, energy, and industrial cooperation project between Pakistan and China. Pakistan has often held its ground and prevailed its priorities getting approved in negotiations with China and some of that prioritization by Pakistan worked well for the Chinese side as well but not always. The paper dispels the commonly held perception that China bulldozes its terms of trade in the Belt and Road Initiative (BRI) projects and shows how the Chinese policymakers accommodate the political concerns of partners and take into account the local realities such as while working with Pakistan since 2015. Through CPEC, China has so far made an investment of $25 billion in Pakistan.

China has been using “adaptive strategies” in its interactions with Pakistani political parties, the military, and local communities. It is particularly evident since the change of government from PML-N to PTI in the latter half of 2018 and Chinese accommodation of concerns of the new PTI government. So much so that Adeney and Boni state, “Examining the domestic contours of the CPEC shows that Pakistani actors have wielded agency in important ways throughout the process, while Chinese actors at times have accommodated key Pakistani demands.”

Pakistan setting the terms of trade for CPEC is reflected in almost all aspects of the project ranging from infrastructure, energy and development of Gwadar port. Soliciting Chinese investment in energy projects in Pakistan was the PML-N government’s top priority. Fixing Pakistan’s energy crisis was the electoral promise of PML-N. It actively sought Chinese help to provide the energy supply for Pakistan mainly through coal-based cheap source of energy. PML-N considered if it fixed the energy situation in Pakistan, it could be reelected in 2018. It shows how Pakistani side played an active role in setting the agenda for CPEC investment.

In infrastructure, Pakistan under the PML-N prioritized building of roads along the eastern route in Punjab and Sindh over the development of western route in Balochistan and Khyber Pakhtunkhwa, although there was a PML-N supported government in Balochistan during most of PML-N’s regime. Partisan political compulsions and making electoral gains through CPEC investments was the reason for PML-N decisions and China went along with it since building infrastructure in more developed provinces of Punjab and Sindh was easier for it as well than the western route.

PTI government did not initially show the same enthusiasm for CPEC as PML-N did from 2015 onwards. However, when PTI warmed up to CPEC regarding taking Special Economic Zones (SEZs) off the ground, it acted as much out of partisan political compulsions as PML-N did during its tenure. The feasibility study of SEZs preferred Hattar in the KP over Rashakai but PTI insisted that the latter be selected due to the preference of its provincial political leadership. Chinese preference was for Hattar but they accommodated PTI’s partisan priorities and went along with the Rashakai option as SEZ in KP.
China wanted Thatta (Dhabeji site) in Sindh, Hattar in KP and M3 Faisalabad site in Punjab. The PML-N government wanted Sheikhupura due to partisan political leadership instead of Faisalabad. PTI government agreed to Thatta and Faisalabad but changed Hattar to Rashakai, although the feasibility study ranked Rashakai lower than other choices communicated by the Chinese. It shows Pakistan’s partisan politics prevailed in CPEC negotiations.

Moreover, progress over SEZs has been slow due to bureaucratic hurdles and political culture in Pakistan. Groundbreaking ceremony for the Faisalabad SEZ in Punjab took place in January 2020. An agreement for development for the Rashakai, KP was signed as late as September 2020. The Dhabeji site in Thatta in Sindh got the seal of approval in principle in October 2020. Overall, it shows that progress on SEZs has been slow.

Gwadar’s development is a shared interest of Pakistan and China. Pakistan has been emphasizing development of Gwadar as far back as the early 2000s and this has been turned into a CPEC project after 2013, when China Overseas Port Holding Office took over the control of Gwadar on Pakistan’s request. China also has “strategic calculations” as far as Gwadar is concerned and it sees it as its point of access to the Indian Ocean. China has been offering interest free loans and grants in the development of Gwadar in contrast with its loaned investment in other projects. It speaks of the Chinese interest in Gwadar.

China is quite concerned about getting the buy-in of the local communities in Gwadar for its involvement in the area. Even appearing to be more concerned than the government of Pakistan at times, it has invested in a number of social development projects in Gwadar, so that the local population can see the dividends of development in Gwadar. It includes Pak-China Friendship Hospital, the Gwadar Livelihoods Project, the establishment of Gwadar University and the Pak-China Technical and Vocational Institute. Still the local fishermen whose livelihoods depend on fishing in the area are concerned about the future of their business and they have been protesting about it. Fishing helps over 2.5 million local people to secure their source of livelihoods, so it is crucial for them.

PTI government slashed funding to some of these social development projects in Gwadar as part of overall austerity when it cut funding for 35% of capital and development projects in the annual Public Sector Development Program (PSDP) for the for the financial year 2018-19 and 16 (everywhere and not just in Gwadar) out of total 455 of these were CPEC projects as well. This slashing of CPEC projects reduced Pakistan’s contribution to CPEC projects by approximately 20 billion Pak rupees.

Similarly, the CPEC’s public pronouncements that it would create local jobs, skilled workforce, and livelihoods for the local population are yet to be fully realised. CPEC was also promised to work for all provinces of Pakistan while the reality is that it has mainly served Punjab and Sindh. As far as Chinese business relocation of its “sunset” industries to Pakistan is concerned, it remains to be seen how much of it will translate into tangible results.

Though CPEC has mostly been run along the centralized lines, its overt centralization may become more tangible with the passage of the CPEC Authority Act. Since 2015, CPEC had more civilian control under PML-N and with the PTI government in office, the footprint of the army in CPEC has increased, a fact that Adeney and Boni do not emphasize too overtly.

The authors also do not discuss the financial terms of Chinese loans (such as the interest rates) to Pakistan as this information may not be available in the public domain yet. However, they emphasize increasing transparency and taking into account the social and financial sustainability of CPEC projects. The authors also advise holding wider consultations, getting the local communities’ buy-in, and identifying national and provincial priorities clearly. For all those interested in CPEC and BRI, this paper is a highly recommended read.

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Naya Daur