Pakistan-China Trade and Economic
Corridor

Economic Analysis

Submitted to: Dr. Mehmood Karim Qureshi
Business Economics for Mathematics
MBA – 2 years (Evening)

Submitted by: Asad Akram
Roll No. 14I – 1216

Introduction:
Pakistan and Chinese governments are planning to execute a trade and economic corridor through the length of Pakistan, from Gwadar in Baluchistan to Kashgar in Xingjiang. It will be a land based transport route alternate to the conventional sea route spanning Persian Gulf to China’s coastal regions. This corridor development can prove vital to bringing Pakistan’s economy back on its feet and also helping China in increasing trade with Middle East and African Countries. More than half of the world's proven oil reserves are located in the Middle East, the top region-based supplier of crude oil to China. In 2012, China imported 5.4 million bbl/d or 56% of its daily consumption in crude oil, of which 48.1% originated from the Persian Gulf.
Up till now, all of this volume has been moved by seaborne oil tankers hauling over some 10,000 nautical miles to terminals along the east and southeast coast of China. Each journey is beset with one of the world's most perilous chokepoints - the Strait of Malacca. This leaves Beijing with tough choices in guaranteeing security in energy supply, practically because nearly 60% of annual oil consumption of this emerging economic powerhouse has to be imported and is still growing. Moreover, superior naval advantage possessed by the U.S. may be able to impede oil traffic heading for China through the waterway extending from the Persian Gulf to Malacca Strait. To meet this challenge Beijing has to strengthen its blue water navy policing its rapidly expanding maritime trading routes. Alternatively, Beijing’s development planners have to build overland pipeline infrastructures in collaboration with upstream transit countries and crude producers, bypassing possible blockade along the shipping lanes over India to the South China Sea. This is best exemplified by the Sino-Myanmar oil and gas pipelines. Another possible way chalked out by the Chinese planners is the Sino-Pakistan “Trade and Energy Corridor” (TEC). Main features of this new initiative are unraveled next in the context of China’s overture in sourcing overseas energy via continental land routes through Gwadar, the transshipping hub. It also shows how the tripos formed of railroad, highway and a pipe shape the pivotal north-south crossroad in Eurasia. The planned “Trade and Energy Corridor” is formed of one transshipment node –the Gwadar Port - and three legs: a pipe, a highway and a railroad. This three-in-one triple corridor carries not only oil but also dry cargos moving to and from Gwadar as a regional hub east of the Persian Gulf.

Background:
As early as 1954 the United States Geological Survey (USGS) conducted a survey of Pakistan’s coastline thereby identified Gwadar a suitable site for a seaport. Notwithstanding, Oman had exercised legal and actual suzerainty over the port of Gwadar, which until September 1958, was an alien enclave in Pakistan on the Makran Coast over 200 years. Islamabad purchased this enclave from Sultanate of Oman for $3 million and it officially became a part of the Pakistan territory. In 1964 the Pakistani Government decided to transform this small and undeveloped fishing village of only a few thousand inhabitants into a deep sea port. Successive governments had drawn up plans for developing Port Bin Qasim (BQ) in Sindh and Gwadar in Baluchistan as alternate ports because of the need to dilute the country’s dependence on the Karachi port, which now handles over 80 percent of Pakistan's international trade. Framed within the transport plan of Pakistan’s 8th Five Year Plan (1993-94) a technical and financial feasibility study on Gwadar Port was conducted by Gifford & Partners & Technecon of Southampton, U.K., jointly with the Karachi-based Pakistani firm, Techno-Consult International. Their efforts made construction of the Gwadar port project a priority evaluated from a multiplicity of causes ranging from logistic, geostrategic to the imperatives of regional development. But actual execution of this undertaking had been postponed until 2001 when Beijing agreed to provide financing and technical assistance. Phase-1 construction work began upon the signing of bilateral agreement on aid and development in March 2002 which took three years to complete. On 18 February 2013, Chinese Overseas Port Holdings Ltd. took over the port managing rights from PSA of Singapore.

I. Gwadar Port: On 20 March 2007, Gwadar port (Phase-1) was officially inaugurated by President Pervez Musharraf, along with Chinese Minister of Communication Li Shingling. The port began cargo handling from 15 March 2008. The first ship carrying 64,000 tons wheat from Canada docked and unloaded, the largest vessel ever called at Pakistan.
However, since first handed over to the Singapore Port Authority (SPA) in 2007, this highly prized asset has been a commercial failure, due to the lack of investment in the port facilities and internal as well as external transport linkages. Concurrently, Baluchistan's instability and local political opposition have scared investors away. In December 2007 the Government of Pakistan approved a plan to build two new large sized shipyards at Gwadar in Baluchistan Province ("Gwadar Shipyard") and Port Qasim near Karachi in Sindh Province ("Qasim Shipyard") on a fast track basis. On February 18th 2013, Pakistan handed over management rights of Gwadar seaport to China upon expiration of the SPA contract.

* Importance: Located 75 km east to the Iranian border closing to the mouth of the Strait of Hormuz and 460 km west of Karachi, Gwadar port witnesses twenty percent of the world’s traded oil and about thirty-five percent of the oil traded by seaborne freight with every passing day. This port and Pakistan at large lie rightly also at the traffic juncture of three regions traditionally lacking direct communication in between: the South, Central and West Asia. Superbly located geo-strategically, it commands together with the prospect to become a world class deep-sea port, having attracted increasing attention. Essentially, Gwadar may turn into a pivotal harbor city, comparable to Singapore, Hong Kong, Colombo and Dubai. Liquid fuels reaching Gwadar by tanker/pipelines would flow to Kashgar, Xinjiang Uyghur Autonomous Region (XUAR), therewith cut thousands of kilometers off the distance to ship oil from Middle East and Africa to China. Spatially, all three legs drawn to Gwadar Port is an engineering setup which looks like a “funnel”. The top of the funnel is this wide area of Central Asia and also China's western region. It gets narrowed down through Afghanistan and Pakistan and the end of this funnel is Gwadar port. Master Plan of the megaproject would see oil being imported from the Middle East, stored in refineries at Gwadar and re-exported to China via roads, pipelines or railway.

II. Roads: a. Karakoram Highway:
The first half - 1,300 km Karakoram Highway setting off from Kashgar to Hasan Abdal - was built from 1959 to 1978. A time-honored achievement, notwithstanding, this lofty spectacle, often referred to as the "eighth wonder of the world”, remained short of accessing the Arabian Sea from China’s landlocked western region. It has to be upgraded and expanded to full length; to pave Karakoram Highway to the sea so as to catch businesses through Gwadar as a regional hub in international trade and shipping. As of 30 June 2006, work is on to widen the KKH. This six-lane highway will increase its operating capacity for heavy vehicular traffic some threefold. b. Motorway:
Lahore-Karachi Motorway, Gwadar-Karachi Motorway, Multan-Sukkur Motorway, East Bay Gwadar Port Expressway are all included in the infrastructure development plan of China-Pakistan Economic Corridor.

III. Railway:
“A map of Karakoram Highway link from Kashgar to Hasan Abdal” Kashgar-Havelian rail link will be built on the same lines.
“A map of Karakoram Highway link from Kashgar to Hasan Abdal” Kashgar-Havelian rail link will be built on the same lines. The Kashgar-Havelian rail link will be constructed by the Chinese Dong Fang Electric Company and will traverse a distance of 700 kilometers, from the Khunjerab Pass to link with the Pakistan rail network at Havelian, in Abbottabad District. Havelian is already connected with Pakistan’s Railways Network. This rail link would be on the similar lines as the KKH, only to share the burden of cargo with the roads network. Kashgar is being made into a special economic zone (SEZ), and the Chinese plan to establish a consulate in Gilgit. Pakistan is keen on laying both this and the Quetta-Kandahar (Afghanistan) railway tracks.
Gwadar will be connected to Pakistan Railway network at an expected cost of $1.25 billion. For the trading partners at the two ends of the TEC, by extending the Kashgar offshoot of ECB (Eurasian Continental Land Bridge, Lianyungang-Rotterdam) to Peshawar in Pakistan's northwest, China and Pakistan can benefit enormously from it along the shortest route, i.e. from Karachi to Peshawar. The rail network could also be used to supply oil from the Persian Gulf to Xinjiang. Actual cost of this second leg is yet to be determined, but 2005 estimates showed it over $10 billion. According to recent news, China is expected to invest $3.5 billion in Pakistan’s Railways network from Karachi to Peshawar. The areas where the money will be injected include replacement of rail tracks over 375 km, deep screening of ballast over 1,260 km, conversion of un-manned level-crossing into underpasses at 50 places, conversion of manned level-crossing into flyovers at 250 places, realignment of 40 big curves, strengthening of 500 bridges and doubling a 438km track at various places between Shahdara and Peshawar.

IV. Pipelines:
The master plan of the TEC or CPEC envisages oil imported from Middle-East to Gwadar, stored in refineries, and re-exported to China via road, railway or pipelines. China has announced to invest in developing a 60000 bbl/d processing capacity oil refinery in Gwadar. This refinery is a part of China’s $12 billion investment planned in Pakistan.

Significance:
The significance of Gwadar as an alternative exit of traffic to and from greater Central Asia warrants undoubted attention. According to ADB’s Ports Master Plan studies this new transport hub excels both Karachi and PQA in terms of proximity to the main international shipping routes and superior harbor conditions, including draft and turnaround time of large bulk carriers. Together with the interconnected domestic traffic network it evokes the whole system to overcome the harsh and complex terrain blocking century-old north-south flow of goods and services. ADB errs nevertheless in maintaining from the viewpoint of Central Asian Regional Economic Cooperation Program (since 1997) that "Gwadar is for Central Asia, not for Pakistan” (2013). Evidently, it is both for Pakistan and China, as the minimum to expedite the sequence of development projects envisaged, as the Ministerial Committee meeting of the Pakistan government dismissed on 1 October, 2008, Karachi and PQA as the candidates for establishing shipyards and transshipment trade. Instead, Gwadar was chosen for it is “a place of great strategic value, enhancing Pakistan's importance in the whole region, extending from the Persian Gulf through the Indian Ocean to Southeast Asia and the Far East”.

Analysis & Conclusion: Post 9/11 world economy has entered a new phase of geopolitical tensions and turbulences across the globe. The so-called “arc of instability” stretching all the way from ISME (Indian Subcontinent & Middle East) to North Africa comprises paradoxically, of countries also within the “arc of opportunities”. Against the dichotomy of risks and reward, TEC surfaced as a co-development agenda over a wide range of strategic investment opportunities Islamabad proposed to China. It occurred at a time when the world’s highest “Tsinghai-Tibet railway” began performance debut. This amazing achievement undoubtedly was instrumental in Beijing’s decision to confront the natural topographical barriers bordering the Karakoram and construct the Kashgar-Havelian rail link. i. In modern day’s calculations, the Malacca passage from Iran or Africa takes 16-25 days for the tankers to complete. Once the revamped Karakoram Highway, rail and energy pipeline corridor come through, this could be done in just 48 hours from the port of Gwadar, although destinations of shipment differ from each other in the two cases. This is dictated by the compulsion of China’s energy security strategy to avert a naval blockade that could stop the flows of life blood – liquid fuels - to China, save voyage time and distance, ii. Secondly, as expected, continuous injection of Chinese capital would benefit the resource-rich but impoverished regions, especially the long-neglected Baluchistan and pockets of Pashtun inhabitants. Pakistan will also receive a transit fee for energy and goods passing through its territories. During the new century, Chinese development aid to Pakistan are no longer confined to infrastructures, defense, regional security against narcotics, Uygur separatism and terrorism, but extended also to trade and investment in minerals, energy, power, communication, and other regional development programs. The pivot exercised by TEC heralds the growing all-weather Sino-Pak ties in a new dimension where two converging trends meet. For China it is accounted for by the exodus and transplantation of the motor of the “great western development” model in alien soil; further, if the Pakistan corridor is developed it will reduce the traffic overload now shouldered by ports in China’s coastal region, integrate the western regions into the world market, and balance regional socioeconomic wealth gap. For Pakistan this endeavor is due to revive the less developed southwest region and the national economy. iii. Besides boosting the region’s trade, the corridor will push bilateral trade between Pakistan and China still higher. China’s exports to Pakistan which was Rs320 billion in FY-2009 rose to Rs642.4 billion in FY-13. Pakistani exports to China rose from Rs54.4 billion in FY—2009 to Rs252 billion in FY-13. The boost followed signing of their Free Trade Agreement. iv. This trade corridor will earn huge sums for Pakistan in the form of transit fee and custom duties etc. Also transit route and its development will generate much needed employment for Pakistanis.