Newsletter No. 1445
News-Analysis
August 30, 2009

 

The following Newsletter has been contributed by Alex Calvo (Shingetsu Member No. 127), who currently serves as Professor of International Relations and International Law, European University in Barcelona.

RENEWED PUSH FOR SPECIAL ECONOMIC ZONE IN PAKISTAN

As explained in Shingetsu Newsletter No. 1366, a large site in the Port Qasim area in Karachi is home to a projected special economic zone for Japanese companies, which would allow them to invest in favorable conditions. The following newsletter describes recent development in this and other private economic cooperation projects between Japan and Pakistan.

Japan’s strategic interest in Pakistan is multifaceted, centered on the need to contribute to Afghan stabilization in the short run but with the more long-term aim of preventing it from becoming completely dominated by China looming in the horizon, an aim shared by India and the United States despite some important differences among Tokyo, New Delhi, and Washington.

Drop in Overall Japanese Exports to Pakistan

According to the Consul-General of Japan Akinori Wada, addressing the SITE Association of Industry of Karachi, a “representative body of industries located in Sindh Industrial and Trading Estates in Karachi,” on 30 May, Japanese exports to Pakistan have dropped by more than 20% in value since 2005, whereas sales of Japanese products and services abroad during the same time period have risen by 30%. [1] Wada declared that “We consider Pakistan a potential market of 170 million people and have increased our investment in Pakistan by US$130 million,” whereas SITE chairman M. A. Jabbar analyzed some potential reasons for the drop in Japanese exports.

Jabbar made it clear that “Japanese products are much superior in quality as compared [with] similar products from China and Korea,” but ventured that whereas traditionally, “The industrialists would purchase Japanese products with full confidence,” in recent times, “the scenario has changed perhaps due to slackness on the part of diplomatic missions of Japan to create awareness for the premium price to be paid for Japanese goods by consumers in proportion to the quality of the life of Japan-origin products against other origins.” According to Jabbar and other Sindh industrialists, the Japanese diplomatic mission in Pakistan is not so active compared to those of the United States or European countries when it comes to protecting their national corporations or pressing Islamabad to crack down on intellectual property rights infringers who sell fake products. [2]

Concerning the trade imbalance in favor of Japan, Wada said that official trade statistics are incorrect and underestimate Pakistani exports to Japan, which truly amounted to more than US$139.4 million in 2007-2008. He added that Pakistan’s poor export performance could improve as new sectors open up and the country’s businessmen take advantage of new opportunities to enter the Japanese market. [3]

The same issue was present at a meeting on 30 June of the Karachi Association of Trade and Industry (KATI), also addressed by the Consul-General of Japan Akinori Wada. Wada stated that Pakistan’s share in bilateral trade should be enhanced, and KATI Chairman Mian Zahid Hussain expressed his view that one of the measures required to achieve such an objective is encouraging more visits by Pakistani businessmen to Japan. [4]

The Energy Sector

In his 30 May speech before SITE Association of Industry of Karachi, Consul-General Wada said that although the auto sector remained the “major investment venue of Japanese joint ventures” a number of “Japanese groups, including Mitsubishi Heavy Industry, Toyota Tsusho Corporation, etc., have shown interest in setting up power plants in Pakistan under the new energy policy.” This statement was qualified by SITE Chairman Jabbar who expressed his view that “Japan appears to be least interested in the ongoing development of energy sector” in comparison with the United States and the European Union. Jabbar called for more Japanese government support in the form of import-export banking facilities.

Another reason for the lack of Japanese interest in power projects may be Pakistan’s frequent change of governments during the last two decades and the resulting lack of policy consistency.

The Motorbike Sector

A sector traditionally dominated by Japanese products, but where Chinese enterprises are making heavy inroads is motorbikes. Whereas just five years ago Japanese brands dominated the Pakistani market—now Honda, Yamaha, and Suzuki are losing market share to their Chinese competitors. Out of 53 industrial units assembling motorbikes in Pakistan, 50 are Chinese-owned, whereas just three are Japanese. Although they have reacted by slashing prices, success has been limited. The case of Karachi, Pakistan’s financial, industrial, and commercial hub, is paradigmatic: Chinese bikes now account for more than 80% of the market. [5]

The Special Economic Zone

The inauguration of “My Karachi Oasis of Harmony,” held at the Karachi Expo Centre from 5 to 7 June, was an occasion for Sindh Assembly Speaker and acting Chief Minister Nisar Khuhro to comment on the state of the Pakistani economy and the challenges ahead. Zubair Motiwala, adviser to the provincial chief minister on investments, also took part in the event, confirming that a Special Economic Zone (SEZ) had been allocated to Japanese investors and entrepreneurs, for which 1,900 acres had been set aside.

Motiwala mentioned Yamaha and Sony among the corporations which have already committed to invest in the zone, which will also comprise housing for their personnel, and stated that it will be modeled on the China-Pakistan Economic Zone (CPEZ) in Kala Shah Kako, near Lahore, in Punjab. [6]

Despite such statements, there are still many details to be finalized before the projected special economic zone can become a reality, and many concerns on the Japanese side to be assuaged. In his 30 June address to KATI, the Consul-General Wada made it clear that the Pakistani government should clarify which facilities will be provided to investors, including tax exemptions. He said efforts to establish the SEZ were appreciated, but “there are things to be resolved and investment prospects have to be defined clearly, while Pakistani government should bring in details about the investment measures taken regarding the Special Economic Zone.”

Wada reminded his audience of the Japanese contribution to Pakistani development by means of financial aid while expressing his desire to see a deepening of trade ties between the two nations, for which “Pakistan needs to develop infrastructure for investment.” He also pointed out that Pakistan’s stability is “very important not only for south Asian region, but for the rest of the world.” [7]

One of the details of interest to potential investors is where goods manufactured in the planned SEZ will be able to be sold. It seems that potential markets will include both Pakistan and foreign countries, as is the case with the CPEZ.

Although the result of a 2006 agreement between Ruba Group of Pakistan and China’s consumer electronics product giant, Haier Group, and inaugurated in a ground-breaking ceremony in December that year attended by Chinese President Hu Jintao, the CPEZ has been beset by troubles concerning the cost of land, which Haier and Ruba have pretended to receive for free or at heavily subsidized prices. The zone benefits from a FTA (Free Trade Agreement) also signed in 2006, whereby goods produced in the CPEZ are supposed to enter the Chinese market tariff-free. In return for such preferential access, China is not only exporting increasing amounts of goods to Pakistan, but also importing raw materials and securing transit rights at the country’s ports. [8]

It is here that an important difference can be observed between the Lahore and Karachi SEZs. Although both make sense in purely economic terms, the former seems to be clearly part of a wider strategic game whereby Beijing seeks to secure access to the Indian Ocean, bypassing the Malacca Straits and encircling India (in what Indian national security circles term a “Chain of Pearls”), whereas Japan lacks a coherent regional strategy in spite of its gradual “normalization” as a military power. [9]

The 2006 FTA signed by Beijing and Islamabad stands in contrast with the obstacles posed by the latter in regard to a transit agreement with Afghanistan, still pending after half a century of intermittent negotiations. Whereas insurgents cross the Durand Line at will, Kabul has unsuccessfully pressed for permission to trade with India through Pakistani territory. Although a memorandum of understanding on a trade and transit agreement between Afghanistan and Pakistan was signed by presidents Obama, Karzai, and Zardari, at a tripartite summit in Washington in May this year, the negotiations have failed to deliver a text. [10]

The construction of the Japanese SEZ in Karachi is scheduled to begin in September this year, the initial cost being US$5 billion. Investors will be allowed to own 100% of the equity of local subsidiaries and freely receive royalties and technical fees. Some local analysts believe the successful operation of the zone might be a step toward promoting Japan’s competitive edge over China in the Pakistani market. [11] It is also hoped that the new zone will contribute toward overcoming one of the factors which in recent years has deterred the presence of some Japanese companies in Karachi; namely the deteriorating security situation. [12]

The Tourism Sector

Another sector in which Japanese cooperation is being sought by Pakistani authorities is tourism. Different ways such cooperation might take place were discussed at a meeting on 7 August between the Japanese Ambassador to Pakistan Chihiro Atsumi and Pakistani Minister for Tourism Maulana Atta ur Rahman. The Federal Secretary of Tourism Ali Arif and Joint Secretary Muhammad Yasin Janjua were also present. Rahman suggested that exchanges on training facilities and asked assistance from Japan in upgrading tourist resorts, scenic locations, and archaeological sites. He expressed his opinion that the country’s tourist potential is immense. The Pakistani side also stressed the need to relax Japanese visa policies and to take into account Islamabad’s recommendations when processing applications by Pakistani citizens. [13]

RECENT CULTURAL EXCHANGES

On a more cultural note, a two-day exhibition of traditional Japanese floral arrangements titled “Ikebana for Peace” was held at the Japanese Consulate and Cultural Centre in Karachi on 10-11 July. Sindh Provincial Minister for Culture and Tourism Sassui Palejo attended the opening of the exhibition and expressed her gratitude for the invitation, adding that she was aware of the crucial importance of relations with Japan. The chairwoman of the Pakistan-Japan Cultural Association of Sindh, Fatima Suraiya Bajia, expressed her appreciation for the efforts of the ladies who had created the around fifty Ikebana arrangements on display.

A short demonstration of Origami, the Japanese art of folding paper into all sorts of animals, plants, and objects, took place within the Ikebana exhibition. Both Ikebana and Origami are traditionally associated with peace, and guests were invited to make small Origami cranes in the name of peace, with Consul-General Wada using the occasion to declare that, “since the devastation caused by the atom bomb in 1945, Japan has made concerted efforts towards a peaceful existence.”

NOTES

[1] SITE Association of Industry of Karachi website, undated; “Japan Worried over 20pc Drop in Sales to Pakistan,” The News International, May 31, 2009.

[2] “Japan Worried over 20pc Drop.”

[3] “Exports Decline to Japan Needs to be Analysed,” The Nation, May 31, 2009.

[4] “Japan for Enhancing Trade with Pakistan,” The News International, July 1, 2009.

[5] Syed Fazl-e-Haider, “Japan Looks for Zone Boost in Pakistan,” Asia Times Online, August 4, 2009.

[6] Faryal Najeeb, “Govt Allocates 1900 Acres for Japanese Zone,” The News International, June 6, 2009.

[7] “Japanese Investors Seek Facilities at Economic Zone,” The Nation, July 1, 2009.

[8] Fazl-e-Haider, “Japan Looks for Zone Boost.”

[9] “[R]ising naval power arms China with the heft to pursue mercantilist efforts to lock up long-term energy supplies, assert control over transport routes, and assemble a ‘string of pearls’ in the form of listening posts and special naval-access arrangements along the great trade arteries.” Cesar Chelala, “China Plays Maritime Chess,” Japan Times, January 22, 2009; “China is acquiring naval bases along the crucial choke-points in the Indian Ocean, not only to serve its economic interests but also to enhance its strategic presence in the region,” Harsh V. Pant, “Indian Ocean: Ruling the Waves,” ISN Security Watch, August 5, 2009; and Christopher W. Hughes, “Japan’s Remilitarization,” London, International Institute of Strategic Studies, 2009.

[10] Alex Spillius, “Barack Obama Demands Afghanistan and Pakistan Unite against Taliban,” Daily Telegraph, May 6, 2009.

[11] Fazl-e-Haider, “Japan Looks for Zone Boost.”

[12] For an overview of the difficult security situation in the city, see “Special Report: US-NATO, Facing the Reality of Risk in Pakistan,” Stratfor, April 27, 2009.

[13] “Japan to Assist in Tourism Projects,” Associated Press of Pakistan, August 8, 2009.

[14] “‘Ikebana for Peace’ at Japanese Consulate,” The News International, July 11, 2009.