China, Pakistan and the challenges of Silk Road connectivity

Scepticism fuelled by Pakistan’s latest anti-dumping ruling against Chinese steel products complicates Beijing’s goal of an integrated trade strategy

PUBLISHED : Tuesday, 20 June, 2017, 8:00am
UPDATED : Tuesday, 20 June, 2017, 11:07pm

Connectivity is seen as a good thing for nations, but sometimes achieving it can be far more difficult and complex than expected, even for close allies, as Pakistan’s latest anti-dumping ruling against Chinese steel products shows.

Islamabad’s latest ruling against China – its “all-weather friend”, according to the official rhetoric – may fuel scepticism about China’s massive “Belt and Road” globalisation initiative. If China can’t persuade its close ally that Chinese exports of steel and infrastructure is a good thing, it will find it much more difficult to convince others.

Europe’s suspicion of Beijing’s top economic-diplomacy play was on view for the public after European Union delegates refused to fully endorse Beijing’s statements at the first Belt and Road summit in Beijing last month. That non-action came on top of a wary view from Washington, Tokyo and New Delhi on Beijing’s ambitious push.

“Pakistan, like every Belt and Road partner, wants its own industries to succeed,” said Jonathan Hillman, a fellow with the Simon chair in political economy at the Washington-based Centre for Strategic and International Studies. In particular, Islamabad hopes the China Pakistan Economic Corridor, a flagship project for the Belt and Belt push, will develop its own manufacturing and exporting operations and have two-way trade flows with China, he said.

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China, Pakistan’s biggest trade partner, has a huge trade surplus with the south Asian country.

Construction on the China Pakistan Economic Corridor, which connects Kashgar in China’s Xinjiang province and Pakistan’s Gwadar Port on the Arabian Sea, started in April 2015. Total investment in the 3,000km corridor is estimated at US$45 billion, with power plants, dams, airports and highway projects in the pipeline.

As a result of the investment push, steel products from China, which produces half the world’s steel, are flooding into Pakistan. According to a report in Pakistan’s Daily Times last year, the country’s steel melting and rolling factories were running at less than 30 per cent of capacity, partly due to local steel mills’ being unable to compete against cheaper Chinese imports.

The National Tariff Commission of Pakistan preliminarily ruled on May 23 that China was “dumping” exports of steel bars into the country, selling them at prices below reasonable costs and hurting local steel companies. The commission will decide whether to impose anti-dumping duties of up to 52.5 per cent when it makes its final determination in six months.

It was not the first time that Pakistan’s steel industry requested a national investigation on the influx of manufacturing products from China; if a stiff tariff is eventually levied, it won’t be the first time that happens, either. Last February, Pakistan imposed a five-year anti-dumping duty on Chinese exports of galvanised steel coils and sheets.

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“The key is ensuring that trading partners are playing by the rules and that there are domestic programmes in place to help workers adjust,” Hillman said. “That’s especially important when your trading partner is China, which is a manufacturing powerhouse and the world’s second largest economy.”

The massive infrastructure package is expected to create 2.3 million jobs for Pakistan from 2015 to 2030 and drive local economic growth by up to 2.5 percentage points. For China, the corridor will offer Indian Ocean access and reduce China’s reliance on the Strait of Malacha for shipping oil and other commodities to enhance energy security.

But concern is growing that the projects serve China more than Pakistan. The steel investigation refuelled speculation about the purpose of China’s economic diplomacy.

“The key rationale for the Belt and Road initiative is very much China’s export of overcapacity,” said Jan Gaspers, head of European China policy at Mercator Institute for China Studies in Berlin.

“The Belt and Road Initiative is just a vehicle for that” and remedying China’s long-time capacity problem, he said, citing trade conflicts with the EU and US. “It is alleviating some pressure in China to reform those industries.”

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Sceptism and distrust have persisted during Beijing’s New Silk Road push. In March, Australia rejected China’s invitation to connect with the globalisation strategy during Premier Li Keqiang’s visit there. The European Union has been investigating a China-funded railway project connecting Budapest and Belgrade because it may be violating the bloc’s public procurement rules. And while refraining from directly confronting Beijing, officials in Brussels nervously have been taking note of China’s increasing influence in central and east Europe.

“It is in China’s long-term interest to make sure that competition is fair and within international rules,” CSIS’ Hillman said. “For the Belt and Road to succeed, it will need enough domestic support within the Belt and Road partner countries, including its closest partners like Pakistan.”

Even in the north, Russia, which is seeking closer ties with China to offset western sanctions, has remained cautious about China’s growing influence in central Asia, Moscow’s geopolitical backyard.

“That’s certainly not the thing Russia likes,” Gaspers said. “There is quite a concern in Moscow. Kremlin doesn’t talk to Beijing about the engagement in central Asia.”

Despite those difficulties, Beijing is expanding the frontier of the Silk Road to Latin America. Brazil has been the scene of political turmoil and a presidential corruption scandal, but China still launched a capacity cooperation fund with South America’s largest economy.

“Almost everyone supports greater connectivity in theory,” Hillman said. “But in practice, it is more complicated. Connectivity, whether through trade agreements or hard infrastructure like the Belt and Road, often brings greater competition.”