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:

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

“A map of Karakoram Highway link from Kashgarto Hasan Abdal” Kashgar-Havelian rail link will be built on the same lines.

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.