China initiated the new model of regional integration in 2013, namely “Belt and Road Initiative (BRI)” with the investment of $ 900 billion, in which China is attempting to connect with more than 65 countries of Asia, Africa, and Europe. Under the umbrella of BRI, China is revitalizing its connectivity with two-thirds of the population of the world through roads, railways, communication networks, energy pipelines, energy transmission lines, dry ports, and seaports.
Six major economic corridors have been inaugurated, and China Pakistan Economic Corridor (CPEC) is one of these provided for China’s connectivity to the Middle East, Africa, and Europe through Pakistan and Gwadar port. Regional countries in Asia (for instance Vietnam & Malaysia) have benefitted by becoming part of China’s production value chain through industrial relocation. Pakistan, in the second phase of CPEC, can potentially benefit from this policy of Industrial Relocation.
The average labor cost of an operational hour in the coastal and inland regions of China is thrice the cost in Vietnam and Pakistan and six times that of Bangladesh
An industry, in theory, would relocate to another city or country if such relocation entails a significant regulatory, locational, or cost advantage. The locational advantages include reduced transportation time due to proximity to raw materials or final markets, and large domestic market size. The cost advantages, on the other hand, include lower input costs, better employees, or overall lower cost of doing business.
The regulatory benefits may cover tax breaks, policy incentives, less stringent controls, etc. Pakistan, lying on China’s access to the Indian Ocean, Persian Gulf, and GCC economies (and providing a bridge towards Mediterranean economies), offers many of these advantages. Chinese interest in the Special Economic Zones (SEZs) can be understood in that context.
Pakistan: What industries can benefit?
Pakistan – if it manages its act well – can be a lucrative market with a growing middle class. The huge potential of the local market has generated significant Chinese interest in household appliances and automotive sectors. In fact, this interest predates CPEC and has included earlier investments by Haier, Gree, and Changhong.
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The locational advantages of Pakistan manufacturing centers and markets (on the way to the Indian Ocean) also support the case for the agri-business and food processing industry, which can form another potential candidate for Chinese investment to serve the local industry as well to target the massive Chinese food market.
The sunset industries in China are being pushed out of the country due to overcapacity, rising production costs, and environmental factors. These include copper and aluminum smelting, cement, papermaking, textiles, iron and steel, light engineering, and low-end motors and machines. The Chinese garments and textile industry seem to be the right choice for relocation.
Energy production by industrial zones (through self-reliance) as envisaged in “Punjab Industrial Policy, 2018, is another vital component of this strategy
China is already facing a surge in production costs, owing to appreciation of its currency, higher cost of raw materials, etc. Moreover, as Chinese labor is graduating from low-paying to high-paying jobs, along with the introduction of improved labor laws, labor costs have risen sharply. The average labor cost of an operational hour in the coastal and inland regions of China is thrice the cost in Vietnam and Pakistan and six times that of Bangladesh.
Pakistan: Unique Challenges
However, there are inherent complexities in such integration of global value chains. Less developed countries with limited manufacturing or industrial advancement – like Pakistan – often join existing value chains in the downstream of the assembly process.
But the success of such industrial integration will depend upon the local country’s natural endowments of labor, land, and energy competitiveness. In order to move up the value chain, a country like Pakistan needs to develop corresponding trained human resources and managerial expertise as well as ensuring cost-effective energy supplies.
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Recent initiatives of skill development programs – like Hunarmand Jawan – through NAVTCC and launch of technical training programs by FIEDMC in collaboration with TEVTA are thus much-needed elements of a national labor force strategy to benefit from this policy of industrial relocation and SEZs. Energy production by industrial zones (through self-reliance) as envisaged in “Punjab Industrial Policy, 2018, is another vital component of this strategy.
Similarly, local SME units need to be trained and equipped through technology and R&D to provide more value-added services and products to the value chain. This strategy may help in progressively moving up the managerial and technical value chain.