The China-Pakistan Axis: Asia's New Geopolitics (18 page)

Like so many economic interactions between China and Pakistan, this one was destined to end in disappointment. A few months after the Walmart story appeared, Pakistan announced that it had missed its mango export target for the year, owing partly to competition from China, its all-weather friend.
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The story was the same the previous year and it would be the same again in 2013. The shipments to China itself never picked up, either. Logistical problems and phytosanitary requirements were the ostensible factors conspiring to deny Chinese consumers the larger, sweeter Pakistani mangoes.
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But the inability of the two sides to achieve a breakthrough on the export of Pakistan’s national fruit was symbolic of a deeper set of problems.

China’s transformation from an autarkic communist backwater into the world’s second largest economy should have been a tremendous opportunity for Pakistan. At the time of Mao’s mangoes, Pakistan’s GDP per capita was ahead of China’s, and the country was dubbed a “model developing country” by Harvard’s Development Advisory Service, while China under the Cultural Revolution was in economic reverse.
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But by 2012 the average Chinese earned five times as much as the average Pakistani, and China’s economy was 35 times the size of Pakistan’s. Close political and security ties alone were never going to be a guarantee of close commercial ones, but in certain aspects they might have been expected to smooth the way, whether it came to market access or tapping the vast new streams of Chinese financing and investment. Yet for a long time the story of the economic relationship between the two sides has been one of excitable headlines touting large numbers, ports, pipe
lines, and energy transit routes followed by frustration, disappointment, stalled projects, and much smaller figures buried away in statistical reports. Commercial ties are expanding—bilateral trade reached $12 billion in 2012—but continue to fall well short of expectations, and look even worse in comparative context. Sino-Indian trade, at $66 billion in 2012, is more than five times larger than China’s trade with Pakistan, and the total volume of trade between China and Pakistan from 1995 to 2007, at $20 billion, was barely half of the Sino-Indian annual trade volume in 2007 alone.
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If this can partly be explained away by India’s sheer scale, telling comparisons can be made with a couple of China’s smaller neighbours. The Philippines, which is roughly the same economic size as Pakistan, trades at three times its level with China. Vietnam, an economy half the size of Pakistan’s, has four times the amount of bilateral trade with the Chinese.
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Moreover, 75% of Sino-Pakistani trade is composed of Pakistani imports of Chinese goods, with only a few billion dollars’ worth heading in the opposite direction. It was only in 2011 that China even broke into the top five destinations for Pakistani exports, at a level still substantially below the EU and the United States.
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The story for investment has been as disappointing as for trade. While grand announcements are made virtually every week about another new influx of Chinese money, the hard numbers have rarely borne them out. Even in the good years for Pakistan, the period between 2000 and 2005 when overall FDI increased by 600%, the investment flow from China only crept up in tiny increments. It amounted to barely $400,000 in 2004/5.
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A surge in 2006/7, the single period in the last decade when China made the official list of the top three investors in Pakistan, was followed by outflows of Chinese investment in subsequent years.
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While these figures from Pakistan’s state bank almost certainly don’t capture everything, in 2013, informal estimates by Pakistani experts for total Chinese investment in the country still run only between $5 billion and $7 billion.
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And when it comes to handing out hard cash, Pakistan has received short shrift. Islamabad’s requests for direct grants from Beijing, of the sort that the United States provides, have elicited the response that this was “unbecoming” for relations among friends.
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In an interview with Pakistani reporters, Zhou Enlai had criticized US economic aid to Pakistan as a form of neo-colonialism.
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When the Zardari government looked to China to provide it with a multi-billion dollar soft loan to help it through the financial crisis in
2008, it was rebuffed.
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The gap between the enormous figures publicized during bilateral visits and the support that is actually delivered is stark: a RAND study puts the total level of financial assistance pledged from China to Pakistan between 2001 and 2011 at $66 billion, but finds that only 6% of it ever came through.
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One leading Chinese expert pithily summarizes the economic section of his essay on Sino-Pakistani relations with the heading: “China-Pakistan Economic Ties: Tiny and Weak”.
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In the context of the broader Sino-Pakistani relationship, the weakness of economic ties has long been seen as a problem by both sides. As Ye Hailin puts it: “The objective has not been to strengthen the two countries’ welfare interests but to strengthen them against common threats. It should be described as a shield to protect their traditional security interests rather than a bridge to lead to common prosperity and wealth.”
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The relationship is often described as a stool with two legs, and there have been fears that the absence of a solid economic foundation risks destabilizing the whole edifice. Even before Deng Xiaoping’s reforms took off in the 1980s, there were attempts to remedy the imbalance. 13% of China’s overseas assistance before 1979 went to Pakistan, with the bulk of it tied to purchases from Chinese companies.
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But it was in the 1990s that the risk really started to look acute. China, focused on sustaining its rapid growth rates, started improving ties with India, which had embarked on a dramatic economic reform process of its own after 1991. The attractions of the booming Indian economy for China have since become a standing admonition and threat to Pakistanis: while the serious business is being transacted with their larger neighbour, Pakistan could end up being written off by Beijing as too plagued with violence, and too willing to put security obsessions over economic needs, to play a mature role in China’s long-term regional plans. If this is partly a geopolitical anxiety, the more basic fear is that Pakistan might simply fail to take advantage of a once-in-a-generation chance to use China’s economic take-off to fuel its own.
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A combination of economic structure, cultural preference, and the vicissitudes of geography used to be enough to explain the weak commercial relationship between China and Pakistan. The two economies lacked complementarity. China was actually a competitor for Pakistani exports, most significantly its dominant textile sector, undercutting it in third countries and eroding the country’s comparative advantage.
Pakistani exporters had a “mental fixation with the western markets”, as one expert put it.
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And while China’s east-Asian neighbours benefited from exposure to its booming coastal cities, the Shenzhens and Shanghais, Pakistan bordered on China’s poorest provinces. But this was all supposed to change. After China’s push to rebalance the coastal and interior economies, Xinjiang enjoyed a sustained boom, becoming one of China’s fastest growing provinces.
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A combination of political will, easy finance, and the China-Pakistan free-trade agreement that took effect in 2007 should have been able to overcome ingrained biases towards Europe, the United States and the Gulf.
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While China may still be partly a commercial competitor, at the very least Pakistan would be well placed to benefit from the same major infrastructure investments, financed by huge sums from Chinese state banks, that were transforming economic life across much of the developing world.
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Pakistan was certainly ready to give the Chinese privileged access to projects, and China extended a similar set of courtesies—as one former Pakistani diplomat put it: “There was a willingness to do things for the sake of political relations—giving loans, we don’t have to stand in line; expeditious processing, approvals, facilitation and so on. We could take advantage of the political relationship but then the commercial side has to work.”
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The problem for Pakistan is that its chits over the last decade have mostly been placed on a series of “mega-projects” that are premised on the value of the country’s strategic economic geography. During Musharraf ’s presidency, a series of plans were dusted off that imagined Pakistan as the heart of a network of trade and energy corridors connecting China’s west to the Indian Ocean and from there to the Middle East. Yet most of these projects were set in motion during a period when the security situation appeared to be under control. And while some of the investments—such as the Thar coal project—had the flavour of being political favours on China’s part, the ambitions that underpinned Musharraf ’s plans seemed plausible for a country that was establishing a profile for itself as a leading emerging market. Pakistan was even included as one of Goldman Sachs’ “Next 11” group, the proto-BRICS, in 2005,
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its GDP growth that year clocking in at almost 9%.
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In subsequent years, not only have growth rates plummeted and violence reached crisis levels, but Chinese workers in Pakistan have become targets to a degree that was unimaginable when the grand initiatives were first launched.
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Instead of being known as China’s gateway to the Gulf,
Pakistan has developed a reputation as the most dangerous country to be an overseas Chinese, with kidnappings and killings taking place with disturbing regularity. Insecurity has not only put paid to plans for some of China’s largest investments, but even posed a risk to the economic relationship as a whole: at certain points the Chinese have threatened to pull every one of their workers out of the country.
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The question has switched from whether the political and security relationship between the two sides will help to give Chinese investors privileged access to a booming new market, to whether these close ties are sufficient to keep the major economic projects alive.

The Karakoram Highway is the most potent symbol of China-Pakistan relations, the close-to-literal realization of the claim that their friendship is “higher than the highest mountain”. Stand at the Khunjerab pass, 15,397 feet high, and you can see a memorial to the “pioneers” who built the “eighth wonder of the world”.
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More than a thousand Chinese and Pakistanis died in the construction process, a stunning feat of engineering that took 27 years to complete. What you see little of is trucks. For anyone familiar with bustling Chinese border posts by Kazakhstan or even North Korea, the relative calm is striking. One reason for the lack of commercial activity can be found 100 miles south of Khunjerab at Attabad, where a huge lake, 14 miles long and more than 100 metres deep, has submerged the road since a landslide in January 2010. In 2006, plans had been launched for trebling the width of the KKH and adding an all-weather surface that could accommodate heavy vehicles.
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Much of the early work on this task would end up under water. While the engineers have pushed ahead with resurfacing limited stretches of the road, the more serious effort instead had to been channelled into the “Attabad realignment project”, a vast tunnelling job through the mountains to reconnect the two sections of the highway.
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In the meantime, small boats—the largest of which can barely fit an SUV on board—shuttle a small volume of goods back and forth across the lake. The China Road and Bridge Corporation, the state-owned infrastructure giant responsible for the work, estimated that it will be completed by mid-2014, but delays continued to set it back.
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Either way, a period of at least four and a half years will have passed with virtually no overland trade between the two countries. Some of the commercial activity that used to take place by road was diverted to planes flying between Kashgar
and Gilgit. Other goods joined the larger bulk of seaborne trade that passes through Karachi. But the truth is that even before the landslides, cross-border movement on the Karakoram Highway was very limited, with the route distinguished for its scenery more than its traffic. In the preceding years the road bore no more than 7–8% of total Sino-Pakistani trade, at best a few hundred million dollars’ worth a year.
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The bulk of Pakistan’s commerce is with Guangdong and Zhejiang provinces, on the south and east coasts, not across the border with Xinjiang. This remains the principal reason that, for years, talk of building a railway across a similar route elicited almost equal levels of eye-rolling in Islamabad and Beijing: “There is no economic rationale for it whatsoever”.
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Not so long ago, the Karakoram Highway had been billed as the final leg of a more recent and even grander project—the establishment of a trade and energy corridor running all the way down to Gwadar, the Baloch port at the mouth of the Persian Gulf. Yet at the opposite end of the corridor, the story was the same. In February 2013, Chinese companies took over the running of a port that had not had a single ship dock in the previous four months, and at best operated at 15% of its capacity.
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Water shortages had seen as many as 20,000 people leave the city over the previous year.
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Infrastructure links with the rest of Pakistan were seriously underdeveloped. Most economic activity was at a standstill. Gwadar was about as far away from the promises of a “Dubai miracle”
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on the Makran coast as it was possible to imagine, and the transport and energy corridor appeared to be little more than a “pipe dream”, as one Pakistani official dismissed it.
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