China’s Free Trade Agreements in South Asia

October 11, 2017 Posted by China Briefing Reading Time: 6 minutes

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China is steadily laying the groundwork for its ambitious ‘One Belt, One Road’ (OBOR) program. Given that it is an expansive regional infrastructure and connectivity initiative, the dismantling of trade barriers throughout the OBOR region is important. China realizes this, and has been actively pursuing free trade agreements (FTAs) with all key stakeholders.

OBOR is now labeled the Belt and Road Initiative (BRI) to reflect the fact that it will connect Asia, Europe, and Africa along five maritime and land routes. This includes two South Asian economic corridors: Bangladesh-China-India-Myanmar (BCIM) and China-Pakistan (CPEC).

As a result, China is actively seeking to improve its trade relations with South Asia. Deeper connectivity, once achieved under the BRI, will boost the development and commercial aspirations of South Asia’s lagging economies, and open up new markets for China. However, China has yet to convince India; the latter is against the China-Pakistan Economic Corridor due to geopolitical concerns.

This article briefly discusses the status of China’s free trade agreement (FTA) talks with the South Asian countries. The talks hold significance for the BRI region, and could lay down the rules and norms that govern the region’s future trade order.

China – Pakistan FTA: Concluded

The China-Pakistan Free Trade Agreement (CPFTA) was concluded in 2006, and came into effect from July 2007. In September, the two countries held their eighth round of negotiations on the second phase of the FTA, which achieved a breakthrough after a two-year stalemate. Pakistan shared its list of 70 high-priority items of export interest, seeking preferential market access to which Chinese officials responded favorably.

Pakistan’s major concerns lie in improving the balance of trade in goods and services, and expanding investment opportunities. Further, China has built strong trade relations with various bilateral partners and multilateral fora like the Association of South East Asian Nations (ASEAN), which makes Pakistan’s treaty provisions with the country less beneficial.

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China – Maldives FTA: Concluded

The two countries have successfully reached a free trade agreement after five rounds of negotiations. China’s Minister of Commerce, Zhong Shan, and the Maldives’ Minister of Economic Department, Mohamed Saeed, signed a memorandum of understanding (MoU) in Beijing on September 16, and confirmed that the deal will soon be signed. This is the first time the island nation has entered into a free trade agreement with an individual country. The terms of their FTA will exempt over 95 percent of bilateral trade flows from tariffs, and enhances cooperation in the areas of finance, medicine, tourism, and fishing.

The Maldives government was keen on completing the FTA earlier this year as the country needs China’s free market access for its fish exports – its main export item. Until 2011, the Maldives enjoyed tariff reductions on its exports to the European Union (EU), the single largest export partner by value. The EU offers these reductions to least developed countries.

China – Nepal FTA: Feasibility study concluded without positive outcome

The two countries have carried a feasibility study for a potential FTA. China has also proposed the development of cross-border economic zones.

In July, Nepal’s commerce ministry concluded that trade relaxations with China would be detrimental to its economic health given its weak manufacturing base. Chinese investment in Nepal is key if FTA talks are to move forward – this would develop Nepal’s production base and, consequently, boost exports. Moreover, it is worth noting that China already provides Nepal with duty-free facility for 8,700 products; this has been largely unutilized due to Nepal’s lack of manufacturing capabilities.

China – Sri Lanka FTA: Exploratory talks underway

Six rounds of official talks have taken place between the two countries, with preparations underway for the next round. Sri Lanka is also considering a free trade agreement with India, although no clear timelines have been established.

Bilateral trade between China and Sri Lanka is growing rapidly, and 42 percent of Sri Lanka’s imports were from China in 2016, valued at US$4.2 billion. However, Sri Lanka’s exports to China amounted to only US$199 million, declining from US$293 million in 2015. Through the FTA negotiations, Sri Lanka is keen to diversify its export footprint in China; its key export items are tea, coconut, footwear parts, apparel, and rubber tires.

China – Bangladesh FTA: Feasibility study proposed

The first meeting to conduct a feasibility study on a bilateral FTA is expected to take place in November in Beijing. Both countries have drawn their terms of reference and fixed delegates to their respective working groups. The move comes after China formally proposed conducting the study last September, which was followed by an MoU.

The proposed FTA does not have many takers in Bangladesh. Loss of revenue and China’s outsized and competitive manufacturing capacity are prominent concerns, as is the fact that Bangladesh already enjoys trade benefits. China grants duty-free access to its markets for 4,886 products for countries deemed least developed (LDC), and Bangladesh qualifies in this regard. The country also enjoys duty-free access to Chinese markets under the Asia-Pacific Trade Agreement (APTA) since 2010. Finally, skeptics of the FTA point to Bangladesh’s current bilateral trade deficit with China, which amounts to US$6.88 billion.

China – India FTA: A pipedream

India is currently participating in negotiations for the China-backed Regional Comprehensive Economic Partnership (RCEP), but has no intention of exploring a bilateral FTA with China. The RCEP proposes a free trade zone between the 10 members of ASEAN, plus six other Asia Pacific countries – Australia, China, India, Japan, South Korea, and New Zealand.

However, India’s stance at the RCEP negotiations reflects a wariness at providing China with any major tariff relaxations. India’s trade deficit with China stands at around US$52 billion, and its domestic industry is firmly opposed to further widening market access to Chinese products.

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