II. Characteristic Elements of the Agreement 5

WORLD TRADE WT/REG237/1 1 December 2008 ORGANIZATION (08-5874)

Committee on Regional Trade Agreements

FACTUAL PRESENTATION

Free Trade Agreement between Pakistan and China (Goods)

Report by the Secretariat

This report, prepared for the consideration of the Free Trade Agreement between Pakistan and China has been drawn up by the WTO Secretariat on its own responsibility and in full consultation with the Parties. The report has been drawn up in accordance with the rules and procedures contained in the Decision for a Transparency Mechanism for Regional Trade Agreements (WT/L/671).

Any technical questions arising from this report may be addressed to Ms. Jo-Ann Crawford (tel: +41 22 739 5422).

WT/REG237/1 Page ii

TABLE OF CONTENTS

I. TRADE ENVIRONMENT 1

A. MERCHANDISE TRADE 1 II. CHARACTERISTIC ELEMENTS OF THE AGREEMENT 5

A. BACKGROUND INFORMATION 5 III. NATIONAL TREATMENT AND MARKET ACCESS PROVISIONS OF THE AGREEMENT 5

A. IMPORT DUTIES AND CHARGES, AND QUANTITATIVE RESTRICTIONS 5 1. General provisions 5 2. Liberalization of trade and tariff lines 6 3. Pakistan's liberalization schedule 7 4. China's liberalization schedule 9

B. RULES OF ORIGIN 10

C. EXPORT DUTIES AND CHARGES, AND QUANTITATIVE RESTRICTIONS 11

D. REGULATORY PROVISIONS OF THE AGREEMENT 11 1. Standards 11 (a) Sanitary and phytosanitary measures 11 (b) Technical barriers to trade 11 2. Safeguard mechanisms 12 (a) Global safeguards 12 (b) Bilateral safeguards 12 3. Anti-dumping and countervailing measures 13 4. Subsidies and State-aid 13 5. Other regulations 13 (a) Customs-related procedures 13 (b) Transparency 13 (c) Intellectual Property 13 (d) Investment 13

E. SECTOR-SPECIFIC PROVISIONS OF THE AGREEMENT 14 IV. GENERAL PROVISIONS OF THE AGREEMENT 14

A. EXCEPTIONS AND RESERVATIONS 14

B. ACCESSION 14

C. INSTITUTIONAL FRAMEWORK 14

D. DISPUTE SETTLEMENT 14

E. RELATIONSHIP WITH OTHER AGREEMENTS CONCLUDED BY THE PARTIES 16 ANNEX I 17

WT/REG237/1 Page 1

PAKISTAN-CHINA FREE TRADE AGREEMENT (GOODS)

Factual Presentation by the Secretariat

I. TRADE ENVIRONMENT

1. The Free Trade Agreement (FTA) between the Islamic Republic of Pakistan and the People's Republic of China (hereafter "the Agreement") is Pakistan's first and China's fourth bilateral regional trade agreement (RTA) notified to the WTO. Although quite different in terms of population size, the countries have similar economic structures. In 2006, manufactures accounted for 81.4% and agricultural products for 13.1% of Pakistan's merchandise exports, while for China manufactures accounted for 92.4% and agricultural products for 3.4% of merchandise exports.1

2. Pakistan's GDP was US$128.8 billion in 2006, while that of China reached US$2.668 trillion.2 With total merchandise exports of US$16.9 billion and imports of US$29.8 billion, Pakistan ranked in 2006 as the world's 65th top exporter and the 50th top importer; with merchandise exports of US$968.9 billion and imports of US$791.5 billion, China ranked as the 3rd top exporter and importer in that year.3 The two economies showed average trade/GDP ratios in 2004-2006 of 40.6 (Pakistan) and 69.0 (China).

A. MERCHANDISE TRADE

3. Developments in recent years in global and intra-Party merchandise trade are presented in Charts I.1 and I.2. Over the period surveyed (1998-2006), Pakistan has run a growing trade deficit with China.

1 WTO Statistics Database, Trade Profiles. 2 WTO Statistics Database, Trade Profiles. 3 UNSD, Comtrade database (2007).

WT/REG237/1 Page 2

Chart I.1 - Pakistan: Merchandise imports from and exports to world and China, 1998-2006

US$billion US$billion 30 3.0 Left hand scale: Right hand scale:

25 Total imports Imports from China 2.5 Total exports Exports to China

20 2.0

15 1.5

10 1.0

0 0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: UNSD, Comtrade database.

Chart I.2 - China: Merchandise imports from and exports to world and Pakistan, 1998-2006

US$billion US$billion 1,000 5.0

900 Left hand scale: Right hand scale: 4.5 Total imports Imports from Pakistan 800 Total exports Exports to Pakistan 4.0

700 3.5

600 3.0

500 2.5

400 2.0

300 1.5

200 1.0

100 0.5

0 0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006

WT/REG237/1 Page 3

4. On the basis of 2006 data from the United Nations' Comtrade database, China is Pakistan's 3rd largest trading partner in terms of imports, accounting for 9.8% of Pakistan's imports, and ranks 11th for Pakistan's exports (3.0% of its exports). Pakistan is China's 54 th largest trading partner in terms of imports, accounting for 0.13% of China's imports, and its 33 rd for exports, accounting for 0.44% of China's exports.

5. The commodity structure of trade among the Parties, as well as of their imports and exports to the world in the period 2004-06, is shown in Chart I.3, on the basis of HS section product categories.

6. Three product categories – machinery, chemicals, and textiles – accounted for 64% of Pakistan's imports from China in the period 2004-2006; base metals and plastics accounted for a further 12.7%. China's three largest export product categories – machinery, textiles, and base metals – made up 64.7% of its total exports in 2004-2006 and accounted for 56.1% of Pakistan's imports from China.

7. A single product category – textiles – accounted for 72.5% of China's imports from Pakistan in the period 2004-2006. Pakistan's three largest export product categories – textiles, vegetables, and raw hides – made up 79.4% of its total exports in the period 2004-2006 and accounted for 79.6% of China's imports from Pakistan.

WT/REG237/1 Page 4

Chart I.3 Pakistan and China: product composition of merchandise trade, annual average 2004-06 Per cent Pakistan's imports from China China's imports from Pakistan

Other Other 5.7 3.8 Miscellaneous 2.1 Chemicals 3.1 Vegetables 2.9 Minerals 3.9 Machinery 41.8 Minerals 3.7 Raw hides 6.3 Stone & cement 4.2

Vehicles 4.8 Textiles 72.5 Base metals 10.4 Plastics 5.7

Base metals 7.0

Textiles 7.3 Chemicals 14.9

Total: US$2.3 billion Total: US$811.7 million Pakistan's global imports China's global imports

Other Other 6.9 8.5 Prepared foods 2.3 Minerals 23.7 Vehicles 3.4 Fat and oils 3.5 Textiles 3.6 Vegetables 4.5 Machinery 41.4 Plastics 5.0 Plastics 5.9

Textiles 5.1 Chemicals 7.4

Base metals 7.8 Optical 7.6

Machinery 21.1 Vehicles 7.9 Base metals 8.2 Chemicals 12.2 Minerals 14.1

Total: US$24.3 billion Total: US$670.9 billion

Pakistan's global exports China's global exports

Other Other 13.1 9.6 Minerals 2.5 Miscellaneous 2.7 Footwear 2.9 Machinery Plastics 3.0 42.3 Minerals 4.8 Optical 3.6

Vehicles 3.8 Raw hides 6.0 Textiles 64.8 Chemicals 4.1 Vegetables 8.6 Miscellaneous 5.9

Base metals 8.0

Textiles 14.4

Total: US$15.5 billion Total: US$774.7 billion

WT/REG237/1 Page 5

II. CHARACTERISTIC ELEMENTS OF THE AGREEMENT

A. BACKGROUND INFORMATION

8. The Free Trade Agreement was signed by the Islamic Republic of Pakistan and the People's Republic of China on 24 November 2006 and entered into force on 1 July 2007.

9. The Agreement was notified to the WTO by the Parties on 18 January 2008 under Article XXIV:7(a) of GATT 1994. The text is available, together with its Annexes, on the Parties' official websites.4

10. The Agreement is composed of 12 Chapters containing 83 Articles, as follows:

Box II.1: Table of Contents of the Agreement Chapter I Initial Provisions Chapter II General Provisions Chapter III National Treatment and Market Access for Goods Chapter IV Rules of Origin Chapter V Trade Remedies Chapter VI Sanitary and Phyto-sanitary Measures (SPS) Chapter VII Technical Barriers to Trade (TBT) Chapter VIII Transparency Chapter IX Investments Chapter X Dispute Settlement Chapter XI Administration Chapter XII Final Provisions

11. In addition, the Agreement contains three annexes with the following: elimination of import customs duties; certificate of origin; and rules of procedure of the arbitral panel.

12. The Agreement contains no explicit transition period: for both Parties tariff reductions or eliminations for the first phase are to be completed within a period of five years, i.e. by 1 January 2012. Duty eliminations or reductions took place on the date of entry into force of the Agreement, i.e. 1 July 2007 and are scheduled to take place on 1 January in subsequent years. According to Article 8.3 of the Agreement, the first review and modification of the tariff reduction modality is to be undertaken by the end of 2011 or the beginning of 2012.5

III. NATIONAL TREATMENT AND MARKET ACCESS PROVISIONS OF THE AGREEMENT

A. IMPORT DUTIES AND CHARGES, AND QUANTITATIVE RESTRICTIONS

1. General provisions

13. The Parties agree to accord national treatment to the goods of the other party in accordance with Article III of the GATT 1994 (Article 7 of the Agreement).

4 http://www.commerce.gov.pk/PCFTA.asp http://gjs.mofcom.gov.cn/aarticle/af/fazzn/200611/20061103845345.html and http://fta.mofcom.gov.cn/pakistan/xieyiwenben.shtml 5 According to the Parties, the first review of the implementation of the Agreement may take place by the end of 2008.

WT/REG237/1 Page 6

14. Market access provisions for the reduction and/or elimination of customs duties are addressed in Annex I. Tariff liberalization covers Chapters 1-97 of the Harmonized System (HS). In the case of Pakistan, the first phase of the Agreement provides for six different categories of tariff reduction modalities as follows: elimination of tariffs within three years (I); duties reduced to 5% or below within five years (II); duties reduced by a margin of preference of 50% within five years (III); duties reduced by a margin of preference of 20% within five years (IV); no concession (V); and excluded (VI). For China for the first phase of the Agreement five categories are foreseen: elimination of tariffs within three years (I); duties reduced to 5% or below within five years (II); duties reduced by a margin of preference of 50% within five years (III); duties reduced by a margin of preference of 20% within five years (IV); and no concession (V).

15. If a Party reduces its applied MFN rate after the entry into force of the Agreement and before the end of the tariff elimination period, the tariff elimination schedule is to be applied to the reduced rate (Article 8.2). Upon request by either Party, the Parties agree to consider accelerating the elimination of customs duties (Article 8.3). The Parties agree to review and modify the tariff reduction modalities every five years. The first review is scheduled to take place either at the end of the fourth year or at the beginning of the fifth year after entry into force of the Agreement, i.e. by end 2010 or the beginning of 2011 (Article 8).

16. Under Phase II of the Agreement, the Parties agree to eliminate tariffs on no less than 90% of products, both in terms of tariff lines and trade volume within a reasonable period of time.6

2. Liberalization of trade and tariff lines7

17. The elimination of tariffs applicable between the Parties is detailed in their corresponding schedules. Tariff elimination began on the date of entry into force of the Agreement, i.e. 1 July 2007; subsequent reductions or eliminations of duties take place on 1 January of following years. The base rate used for tariff reductions is the applied MFN rate (2006).

18. The overall tariff elimination under the Agreement is depicted in Tables III.1A and III.1B below.8 In the case of Pakistan, 5.8% of total tariff lines were already duty-free on an MFN basis in 2006.9 A further 7.0% of tariff lines became duty-free for imports from China in 2007; in terms of imports from China for the period 2004-2006, these figures amount to 11.6% and 9.4%, respectively. By the end of the transition period in 2012, a further 23.6% of tariff lines are to be liberalized, accounting for 23.4% of imports from China for the period 2004-2006.10 Thus, a total of 36.4% of tariff lines are liberalized under the Agreement, corresponding to 44.4% of imports by value from China for the period 2004-2006.

Table III.1A

6 According to the Parties the second phase of the Agreement will begin after completion of the first phase of tariff elimination/reduction. The period of completion of the second phase will be negotiated by the Parties. 7 Unless otherwise specified, all statistics, tables and charts contained in this document have been prepared on the basis of data provided by the Parties. 8 Tariff lines containing in-quota duties are excluded from all the tariff-related calculations. 9 Pakistan's tariff is composed of 6,911 tariff lines at the HS 8-digit level, of which 6,867 contain ad valorem rates; the remaining 44 lines are subject to specific duties. 10 2010 is the last year when tariffs are scheduled to be fully liberalized. Further tariff reductions are scheduled to take place in 2011 and 2012.

WT/REG237/1 Page 7

Tariff elimination commitments under the Agreement and corresponding average trade A. Pakistan % of total lines in Value of Pakistan's imports % of Pakistan's total Duty phase-out Number of lines Pakistan's tariff from China (2004-2006) imports from China period schedule in million US$ 2004-2006 MFN duty free (2007) 399 5.8 226.4 11.6 2007 486 7.0 184.4 9.4 2008 31 0.4 0.8 0.0 2010 1,601 23.2 457.0 23.4 Remain dutiable 4,394 63.6 1,088.3 55.6 Total 6,911 100.0 1,956.9 100.0

Source: WTO Secretariat based on data provided by Pakistan and WTO-IDB (2004 Imports from China). Exchange rates Pakistan rupees per US dollar: 2005: 59.5145 ; 2006: 60.2713 (Source: IFS)

19. In the case of China, 8.4% of total tariff lines were already duty-free on an MFN basis in 2007.11 A further 9.4% of tariff lines became duty-free for imports from Pakistan in 2007; in terms of imports from Pakistan for the period 2004-2006, these figures amount to 3.7% and 15%, respectively. By the end of the transition period in 2012, a further 17.7% of tariff lines are to be liberalized, accounting for a further 11.6% of imports from Pakistan for the period 2004-2006. 12 Thus, a total of 35.4% of tariff lines are liberalized under the Agreement, corresponding to 30.3% of imports by value from Pakistan for the period 2004-2006.

Table III.1B Tariff elimination commitments under the Agreement and corresponding average trade B. China Value of China's imports % of China's total Duty phase-out % of total lines in Number of lines from Pakistan (2004-2006) imports from Pakistan period China's tariff schedule in million US$ 2004-2006 MFN duty free (2007) 640 8.4 28.8 3.7 2007 720 9.4 117.2 15.0 2008 59 0.8 0.3 0.0 2010 1,291 16.9 90.8 11.6 Remain dutiable 4,936 64.6 544.8 69.7 Total 7,646 100.0 781.8 100.0

Source: WTO Secretariat based on data provided by China.

3. Pakistan's liberalization schedule

20. The base rates used by Pakistan for implementing its tariff liberalization scheme provided for 5.8% of tariff lines being duty free before the entry into force of the Agreement. As can be seen from Chart III.1, most of the lines freed of duties in 2007, 2008 and 2010 are subject to rates of 10% or less. In 2011 and 2012, duties on some products are reduced, but no elimination of duties takes place. The 4,394 tariff lines which remain subject to duties have a range of 2.25% to 90%.

11 China's tariff is composed of 7,646 tariff lines at the HS 8-digit level, of which 7,597 are subject to ad valorem rates. For the 49 lines subject to specific duties, China has provided ad valorem equivalent rates. Such lines occur in HS Chapters 2, 5, 37, and 85. 12 2010 is the last year when tariffs are scheduled to be fully liberalized. Further tariff reductions are scheduled to take place in 2011 and 2012.

WT/REG237/1 Page 8

Chart III.1 Pakistan's duty elimination under the Agreement

n 2011 e m t a e r

t 2010

e e r f

u 2009 d

e 2008 Y

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 Number of duty-free lines (cumulative)

MFN is: Duty-free <10% <20% <30% <40% >50%

Source: WTO Secretariat estimates, based on data provided by Pakistan.

21. Table III.2 shows Pakistan's trade liberalization commitments under the Agreement on the basis of products' treatment at the HS 8-digit level organized by HS section product categories. Of the 6,911 tariff lines forming Pakistan's tariff schedule, 399 tariff lines were already duty-free on an MFN basis in 2007; the lines liberalized upon entry into force of the Agreement and in 2008 are agricultural products, minerals, chemicals, and machinery. In 2010, an additional 1,602 lines covering most HS sections are subject to liberalization. The 4,394 lines which remain subject to duties cover all HS sections.

Table III.2 Pakistan: Tariff elimination under the Agreement, by HS section MFN Total Number of duty-free MFN Remain Average Final HS section and description average No of lines 2007 dutiable Tariff (Dutiable) % lines 2007 2008 2010 I Live animals and animal products 11.7 248 24 86 20 118 15.3 II Vegetable products 10.9 312 68 21 14 52 157a 11.7 III Animal or vegetable fats and oils 11.8 54 3 51a 9.9 IV Prepared food etc. 24.1 229 12 217 20.6 V Minerals 8.2 195 23 46 12 50 64 5.9 VI Chemical and products 8.3 1,153 51 112 1 551 438a 10.0 VII Plastics and rubber 16.9 300 21 30 249 17.0 VIII Hides and skins 10.2 93 38 17 38 15.0 IX Wood and articles 12.1 106 34 5 67 12.2 X Pulp, paper etc. 16.0 182 28 21 133 17.9 XI Textile and textile articles 18.8 921 30 3 888 16.0 XII Footwear, headgear 23.2 53 53 11.4 XIII Articles of stone 21.9 191 10 181 16.6 XIV Precious stones, etc. 5.0 60 3 49 8a 5.0 Table III.2 (Cont'd) XV Base metals and products 13.7 761 24 200 537 13.6 XVI Machinery 12.8 1,247 46 221 4 338 638 17.6 XVII Transport equipment 33.3 287 1 48 238 38.6 XVIII Precision equipment 9.4 274 7 183 84 15.5

WT/REG237/1 Page 9

MFN Total Number of duty-free MFN Remain Average Final HS section and description average No of lines 2007 dutiable Tariff (Dutiable) % lines 2007 2008 2010 XIX Arms and ammunition 20.2 52 52 5.0 XX Misc. manufactured articles 20.5 186 1 4 181 11.6 XXI Works of art, etc. 5.7 7 5 2 7.5 Total 14.5 6,911 399 486 31 1,601 4,394 16.1 a Mixture of ad valorem and specific duties (tariff lines with specific duties are excluded from the computation).

Source: WTO estimates based on data provided by Pakistan.

4. China's liberalization schedule

22. The base rates used by China for implementing its tariff liberalization scheme already provided for 8.4% of tariff lines being duty free before the entry into force of the Agreement. As can be seen from Chart III.2, most of the additional 9.4% of tariff lines freed upon entry into force held base rates of 10% or less. Further eliminations of duties are scheduled to take place in 2008 and 2010. In 2011 and 2012, duties on some products are reduced, but no elimination of duties takes place. The 4,936 tariff lines which remain subject to duties have a range of 2% to 65%.

Chart III.2 China's duty elimination under the Agreement

n 2011 e m t a e r

t 2010

e e r f

u 2009 d

e 2008 Y

0 500 1,000 1,500 2,000 2,500 Number of duty-free lines (cumulative)

MFN is: Duty-free <10% <20% <30%

Source: WTO Secretariat estimates, based on data provided by China.

23. Table III.3 shows China's trade liberalization commitments under the Agreement at the HS 8-digit level organized by HS section product categories. Of the 7,646 lines forming China's tariff schedule, 640 lines were already MFN duty-free in 2007; an additional 720 tariff lines were liberalized upon entry into force of the Agreement (comprising both agricultural and industrial products). A total of 4,936 tariff lines covering all HS sections remain dutiable under the Agreement.

Table III.2 China: Tariff elimination under the Agreement, by HS section HS section and description MFN Total MFN Number of duty-free Remain Average Final

WT/REG237/1 Page 10

average No of lines 2007 dutiable Tariff (Dutiable) % lines 2007 2008 2010 I Live animals and animal products 12.2 377 44 8 325a 10.3 II Vegetable products 14.5 457 48 62 3 53 291 15.4 III Animal or vegetable fats and oils 12.9 53 2 51 12.9 IV Prepared food etc. 18.0 279 1 4 2 38 234 18.0 V Minerals 3.7 199 37 64 57 41 5.3 VI Chemical and products 6.9 1,189 9 75 414 691a 6.6 VII Plastics and rubber 9.6 263 1 21 241 7.1 VIII Hides and skins 12.3 106 3 4 18 81 10.6 IX Wood and articles 4.3 189 72 30 87 6.1 X Pulp, paper etc. 5.3 160 35 125 6.6 XI Textile and textile articles 11.6 1,105 437 33 67 568 8.4 XII Footwear, headgear 18.4 56 56 13.7 XIII Articles of stone 13.5 184 1 6 10 6 161 9.8 XIV Precious stones, etc. 10.0 84 32 1 13 38 18.4 XV Base metals and products 7.4 714 4 13 7 251 439 6.6 XVI Machinery 8.4 1,398 260 3 210 925a 7.7 XVII Transport equipment 12.3 318 1 65 252 11.7 XVIII Precision equipment 10.2 307 31 28 40 208 10.7 XIX Arms and ammunition 13.0 21 21 6.5 XX Misc. manufactured articles 11.6 178 62 22 94 17.4 XXI Works of art, etc. 9.6 9 2 7 7.5 Total 9.8 7,646 640 720 59 1,291 4,936 9.4 a Mixture of ad valorem and specific duties (tariff lines with specific duties are excluded from the computation).

Source: WTO estimates based on data provided by the China authorities.

B. RULES OF ORIGIN

24. Disciplines regarding rules of origin are set out in Chapter IV of the Agreement. Article 12 defines the terms used and Articles 13-24 provide the substantive rules.

25. A good is considered as originating when it (Article 13):

(a) is wholly obtained or produced in one of the Parties;13 or

(b) fulfils a minimum local value content of 40% determined in accordance with Article 15; or

(c) has undergone sufficient transformation in accordance with the product specific criteria annexed to the rules of origin.14

13 "Wholly obtained" applies to goods obtained in one or both of the Parties that are plant and plant products harvested, picked or gathered there; live animals born and raised there; products obtained from live animals; products obtained from hunting, trapping, fishing, aquaculture, gathering or capturing conducted there; minerals and other naturally occurring substances, extracted or taken from their soil, waters, seabed or beneath their seabed; products taken from the waters, seabed or beneath the seabed outside the territorial waters of that Party; provided that that Party has the right to exploit such waters, seabed and beneath the seabed in accordance with international law; products of sea fishing and other marine products taken from the high seas by vessels registered with a Party or entitled to fly the flag of that Party; products processed and/or made on board factory ships registered with a Party or entitled to fly the flag of that Party; parts or raw materials recovered there from articles which can no longer perform their original purpose nor are capable of being restored or repaired; articles collected there which can no longer perform their original purpose nor are capable of being restored or repaired and are fit only for disposal or recovery of parts of raw materials, or for recycling purposes; waste and scrap resulting from manufacturing operations conducted there; and goods obtained or produced in a Party solely from the aforementioned products. 14 According to the Parties, no product specific rules of origin have been negotiated thus far. Such rules will be annexed to the rules of origin when negotiated.

WT/REG237/1 Page 11

26. Bilateral cumulation is allowed under the Agreement (Article 16) i.e., cumulation in terms of materials and components between the Parties.

27. Article 18 of the Agreement provides a list of minimal, non-qualifying operations carried out in the territory of the Parties which do not confer origin. Products may be transported through third countries as long as they satisfy the conditions specified in Article 19. Additional rules in Articles 20-22 clarify how certain materials (packaging materials; accessories, spare parts or tools; and indirect materials) are to be treated/valued when determining the origin of goods.

Box III.1: Rules of Origin: Basic Features at a Glance  A single rule of origin methodology – minimum local value content of 40% - applies.  Bilateral cumulation.  No tolerance rule.  Outward-processing not authorized.  Transit through third parties authorized only under certain conditions.

Source: WTO Secretariat

C. EXPORT DUTIES AND CHARGES, AND QUANTITATIVE RESTRICTIONS

28. There are no provisions on export duties and charges in the Agreement.

D. REGULATORY PROVISIONS OF THE AGREEMENT

1. Standards

(a) Sanitary and phytosanitary measures

29. Chapter VI lays down the provisions applying to sanitary and phytosanitary measures. In Article 29 the Parties reaffirm their existing rights and obligations under the WTO Agreement on the Application of SPS Measures. With regard to transparency, they agree to cooperate as per the transparency requirements of the SPS Agreement and to exchange information related to sanitary and phytosanitary conditions in their territories. Article 34 provides for the establishment of a Committee on Sanitary and Phytosanitary matters composed of each Party's representatives within two months of the Agreement's entry into force. The Committee meets at least once a year unless the Parties agree otherwise.

(b) Technical barriers to trade

30. Chapter VII lays down the provisions applying to standards and technical regulations. The Parties reaffirm their existing rights and obligations with respect to each other under the WTO Agreement on Technical Barriers to Trade and agree to use international standards or relevant parts thereof as the basis for their technical regulations and related conformity assessment procedures. Article 39 provides for the Parties, through consultation, to seek to identify specific cooperation areas and products, and arrange for cooperative implementation initiatives. Article 40 provides for a range of measures to improve transparency of technical regulations including electronic transmission of proposals to the other Party's inquiry point. In Article 41, the Parties agree to establish a Joint Committee on Technical Barriers to Trade to monitor the implementation and administration the provisions of Chapter VII. The Committee meets at least once a year unless agreed otherwise by the Parties.

WT/REG237/1 Page 12

2. Safeguard mechanisms

(a) Global safeguards

31. Under Article 26 the Parties maintain their rights and obligations under Article XIX of GATT 1994 and the Agreement on Safeguards. Actions taken pursuant to WTO rules are not subject to the Agreement's rules on dispute settlement.

(b) Bilateral safeguards

32. Article 27 sets out the rules that apply to the imposition of a bilateral safeguard measure. During the transition period15, a Party may impose a bilateral safeguard measure on a product benefiting from preferential tariff treatment under the Agreement if there is an increase in imports in absolute terms and under such conditions as to constitute a substantial cause of serious injury or threat thereof to the domestic industry of the importing Party producing a like or directly competitive good.16 Disciplines regarding the application of such measures include an investigation by the Party's competent authorities prior to its application; its scope and duration; consultation procedures; and compensation. The Parties agree within five years of the entry into force of the Agreement to meet to determine whether there is a need to maintain the bilateral safeguard mechanism. The conditions applicable to the use of bilateral safeguards are detailed in Table III.4. Table III.4: Conditions applied to the application of bilateral safeguards Specific Conditions

Precondition Rise in imports In absolute terms Serious injury or actual threat thereof to Criteria  the domestic industry Measures allowed i) the applied MFN rate in effect when measure was taken, or the applied MFN rate in effect on date of entry into force of the Suspension of further duty reduction, or Agreement. increase in duty rate to a level not to ii) For seasonal goods, the applied MFN rate in effect for the exceed the lesser of immediately preceding corresponding season, or the applied MFN rate in effect on the date of entry into force of the Agreement. Timing Maximum duration, including extension Two years plus one year extension Safeguard measure may be applied Retention of the measures to be reviewed at the end of the transition during the transition period of the good period, i.e. five years from date of entry into force of the Agreement. concerned Conditions or Information of the institution of a In accordance with Article 3 of the WTO Agreement on Safeguards limitations proceeding through written notice Consultation  Prior investigation In accordance with Article 4 of the WTO Agreement on Safeguards Immediate compensation. Retaliation only after 18 months from the Compensation imposition of the safeguard measure. No bilateral safeguard measure may be taken against a particular good Imposition of a global safeguard while a global safeguard measure in respect of that good is in place. measure Upon imposition of a global safeguard measure, any existing bilateral safeguard measure is to be terminated.

Source: WTO Secretariat.

15 The transition period means the "five-year period in the first phase of customs duty reduction or elimination". The Parties will meet to determine the definition of the transition period of the second phase of tariff liberalization. 16 "Serious injury" is defined in Article 27.1 of the Agreement as "a significant overall impairment in the position of a domestic industry". A threat of serious injury means "serious injury that, on the basis of facts and not merely on allegation, conjecture or remote possibility, is clearly imminent".

WT/REG237/1 Page 13

3. Anti-dumping and countervailing measures

33. Under Article 25 of the Agreement the Parties maintain their rights and obligations under the Agreement on the Implementation of Article VI of the GATT 1994 and the Agreement on Subsidies and Countervailing Measures. Antidumping actions taken pursuant to the WTO agreements shall not be subject to the Agreement's rules on dispute settlement.

4. Subsidies and State-aid

34. The Parties maintain their rights and obligations under the WTO Agreement on subsidies and countervailing measures (Article 25).

5. Other regulations

(a) Customs-related procedures

35. Customs procedures related to rules of origin are detailed in Annex II which contains a sample of the certificate of origin which is to be issued by the government authority designated by the exporting Party and notified to the other Party in accordance with the operational certification procedures, as laid out in Annex II.

(b) Transparency

36. Chapter VIII provides for a range of measures to promote transparency including the establishment of contact points; prompt publication of measures on any matter covered by the Agreement; notification and provision of information; and access to confidential information.

(c) Intellectual Property

37. Article 10 provides that any right holder initiating procedures for suspension by the customs authorities of the release of suspected counterfeit trademark or pirated copyright goods into free circulation is required to provide adequate evidence to satisfy the competent authorities that, under the relevant laws of the Party importing the goods, there is prima facie an infringement of the right holder's IPR and to supply sufficient information to make the suspected goods reasonably recognizable to the customs authorities.

(d) Investment

38. Chapter IX of the Agreement sets out the provisions relating to investment. Investment is defined as every kind of asset invested by investors of one Party in accordance with the laws and regulations of the other Party in the territory of the latter, including movable and immovable property and other property rights such as mortgages, pledges and similar rights; shares, debentures, stock and any other kind of participation in companies; claims to money or to any other performance having an economic value associated with an investment; intellectual property rights, in particular copyrights, patents, trade-marks, trade-names, technical process, know-how and good-will; and business concessions conferred by law or under contract permitted by law, including concessions to search for, cultivate, extract or exploit natural resources. Investors are defined as natural persons who have the nationality of either Party in accordance with its laws, and legal entities, including companies, associations, partnerships and other organizations, incorporated or constituted under the laws and regulations of either Party and having their seats in that Party.

WT/REG237/1 Page 14

39. Further provisions of Chapters IX relate to the promotion and protection of investment, treatment of investors and investments, expropriation, compensation for damages and losses, transfers, subrogation, and the settlement of disputes between Parties and between investors and one Party.

E. SECTOR-SPECIFIC PROVISIONS OF THE AGREEMENT

40. There are no sector-specific provisions in the Agreement.

IV. GENERAL PROVISIONS OF THE AGREEMENT

A. EXCEPTIONS AND RESERVATIONS

41. There are no provisions in the Agreement relating to exceptions and reservations.

B. ACCESSION

42. There is no provision in the Agreement for the accession of third parties.

C. INSTITUTIONAL FRAMEWORK

43. Article 11 provides for the establishment of a Committee on Trade in Goods, comprising representatives at the level of joint secretary, director general or deputy director general. The Committee's functions include promoting trade in goods between the Parties, including through consultations on accelerating tariff elimination under the Agreement; addressing barriers to trade in goods between the Parties, especially those related to the application of non-tariff measures; monitoring and evaluating the implementation of tariff reduction schedules; and any other issue related to trade in goods, referred to by either Party.

44. Article 75 provides for the establishment of a Free Trade Commission responsible for supervising the implementation and interpretation of the Agreement. It is also responsible for facilitating the avoidance and settlement of disputes and the supervision of the work of all committees and working groups established under the Agreement. The Free Trade Commission meets at least once a year in regular session, or as otherwise mutually determined by the Parties.

D. DISPUTE SETTLEMENT

45. Chapter X sets out the procedures that apply to the avoidance and settlement of disputes between the Parties regarding questions of interpretation or application of the Agreement. In the event that consultations between the Parties fail to settle the dispute an arbitral tribunal may be appointed. Article 60 provides for a forum election clause for matters falling under both the Agreement and other agreements to which both Parties are party; however, once the complaining Party has chosen the forum to settle the dispute, that forum shall be used to the exclusion of the others (exclusive forum clause).

46. The Agreement provides for detailed steps for dispute resolution, the most salient of which are synoptically described below. It requires the Parties to establish rules of procedure to ensure that they have the right to a hearing before the arbitral panel and the opportunity to present initial submissions and counter-submissions in writing (Annex III). The hearings before the arbitral panel, the deliberations and preliminary report, as well as all the communications presented are confidential (see Table IV.1). The Parties may, however, disclose statements of their own positions to the public.

WT/REG237/1 Page 15

Table IV.1 Synopsis of the Pakistan-China FTA's Dispute Settlement Provisions

Implementation Consultations (Art. 59) In agreement by the Parties (Art 71)

30 or 15 days (perishable goods) 30 days from receipt of final report failure to reach agreement

Referral to the Commission (Art. 61) Non-implementation Negotiations on mutually acceptable 60 or 30 days (perishable goods) compensation (Art. 72.1)

Written request for establishing an Suspension of Benefits- (Art. 72.1) Arbitral Panel (Art. 62) If no agreement on compensation (30 days), complaining Party may suspend benefits

Composition (Art. 63) Rules of procedure (Annex III) Arbitral Panel Determination (Art. 72) if Party considers level of suspension of Max 60 days for composition benefits is excessive

Hearings (Annex III) 60 days from request

90 days or 60 days (perishable goods) Referral to original Panel determination (Art. 73) Panel initial report to be sent to the Parties (Art. 69)

30 days 90 days after referral

Panel final report (Art. 70)

Release of Arbitral Report (Art. 73.2) 15 days from Parties' release

Report becomes public (Art. 70.4)

WT/REG237/1 Page 16

E. RELATIONSHIP WITH OTHER AGREEMENTS CONCLUDED BY THE PARTIES

47. Table IV.2 lists the regional trade agreements (RTAs), (notified and non-notified to the GATT/WTO and in force), as of 1 August 2008 to which Pakistan and China are parties.

Table IV.2 Pakistan and China: Participation in other RTAs (notified and non-notified in force) as of November 2008

Date of entry Type of GATT/WTO Notification Partner / Agreement into force agreement Year WTO Provision

PAKISTAN Malaysia 01.01.08 Goods & Services 2008 Enabling Clause & GATS Art. V Mauritius 30.11.07 Goods not notified Iran 01.10.06 Goods not notified SAFTA 01.01.06 Goods 2008 Enabling Clause Sri Lanka 12.06.05 Goods 2008 Enabling Clause ECO Signed 17.07.03 Goods 1992 Enabling Clause not implemented* SAPTA 07.12.95 Goods 1997 Enabling Clause GSTP 19.04.89 Goods 1989 Enabling Clause PTN 11.02.73 Goods 1971 Enabling Clause CHINA ASEAN 01.07.07 Services 2008 GATS Art. V Chile 01.10.06 Goods 2007 GATT Art. XXIV Macao, China 01.01.04 Goods & Services 2003 GATT Art. XXIV & GATS Art. V New Zealand 01.10.08 Goods & Services not notified Hong Kong, China 01.01.04 Goods & Services 2003 GATT Art. XXIV & GATS Art. V ASEAN 01.07.03 Goods 2004 Enabling Clause Accession to APTA 01.01.02 Goods 2004 Enabling Clause Source: WTO Secretariat.

* According to Pakistan, this Agreement will become operational from 1 January 2009.

SAFTA: South Asian Free Trade Agreement. ECO: Economic Cooperation Organization. SAPTA: South Asian Preferential Trade Arrangement. GSTP: Global System of Trade Preferences. PTN: Protocol relating to Trade Negotiations among developing countries. APTA: Asia Pacific Trade Agreement (Bangkok Agreement).

WT/REG237/1 Page 17

ANNEX I

Indicators of trade liberalization under the Pakistan-China FTA

1. A comparison between the scheduled elimination of tariffs applied to the Parties' mutual imports and the duty rates applied by them to MFN imports is shown in Tables A.1 (Pakistan) and A.2 (China) below, by agricultural (WTO definition), non-agricultural and total products. Applied MFN duty rates in 2007 serve as a comparison.

2. Pakistan has a variable MFN tariff structure. Its (unweighted) average MFN rate (2007) is 14.5% on all goods, with a slightly higher average tariff applied to agricultural goods than to non-agricultural products. 5.8% of Pakistan's tariff lines are duty-free at an MFN level. On entry into force of the Agreement, China's exporters enjoyed a relative margin of preference of 9% on non- agricultural products vis-à-vis the prevailing average MFN tariff in 2007 and a relative margin of preference of 8.8% in agricultural goods. By the end of the transition period in 2012, these margins of preference increase to 29.7% and 26.4%, respectively, while the share of duty-free lines increases to 36.4%.

Table A.1 Pakistan: Indicators of MFN tariff rates and preferential rates for imports from China ALL PRODUCTS Agricultural products a Non-agricultural products Average applied Average applied Average applied Share of Share of Share of Origin of tariff tariff tariff Year duty-free duty-free duty-free goods On On On Overall tariff Overall tariff lines Overall tariff lines dutiable dutiable dutiable (%) lines (%) (%) (%) (%) (%) (%) (%) (%) MFN 2007 14.5 15.4 5.8 14.8 17.5 15.0 14.5 15.2 4.5 China 2007 13.2 15.1 12.8 13.5 16.6 17.6 13.2 15.0 12.1 2008 12.5 14.4 13.3 12.9 16.2 19.4 12.4 14.2 12.4 2009 11.7 13.5 13.3 12.3 15.4 19.4 11.7 13.3 12.4 2010 11.0 17.4 36.4 11.7 17.2 30.5 11.0 17.5 37.3 2011 10.7 16.8 36.4 11.3 16.7 30.5 10.6 16.9 37.3 2012 10.2 16.1 36.4 10.9 16.1 30.5 10.2 16.2 37.3 a WTO Definition.

Source: WTO Secretariat estimates based on data provided by Pakistan.

3. China has a variable MFN tariff structure. Its (unweighted) average MFN rate (2007) is 9.8% on all goods, with a higher average tariff applied to agricultural goods than to non-agricultural products. 8.4% of China's tariff lines are duty-free at an MFN level. On entry into force, Pakistan's exporters enjoyed a relative margin of preference of 20.2% on non-agricultural products vis-à-vis the prevailing average MFN tariff in 2007, and a relative margin of preference of 12.4% in agricultural goods. By the end of the transition period in 2012, these margins of preference increase to 42.7% and 22.2%, respectively, while the share of duty-free tariff lines increases to 35.4%. Table A.2 China: Indicators of MFN tariff rates and preferential rates for imports from Pakistan ALL PRODUCTS Agricultural products a Non-agricultural products Average applied Average applied Average applied Share of Share of Share of Origin of tariff tariff tariff Year duty-free duty-free duty-free goods On On On Overall tariff Overall tariff lines Overall tariff lines dutiable dutiable dutiable (%) lines (%) (%) (%) (%) (%) (%) (%) (%) MFN 2007 9.8 10.7 8.4 15.3 16.4 6.9 8.9 9.8 8.6 Pakistan 2007 8.0 9.7 17.8 13.4 15.4 13.2 7.1 8.7 18.6 2008 7.6 9.3 18.5 13.1 15.1 13.6 6.7 8.3 19.4 2009 7.1 8.7 18.5 12.7 14.7 13.6 6.2 7.7 19.4 Table A.2 (Cont'd)

WT/REG237/1 Page 18

ALL PRODUCTS Agricultural products a Non-agricultural products Average applied Average applied Average applied Share of Share of Share of Origin of tariff tariff tariff Year duty-free duty-free duty-free goods On On On Overall tariff Overall tariff lines Overall tariff lines dutiable dutiable dutiable (%) lines (%) (%) (%) (%) (%) (%) (%) (%) 2010 6.7 10.3 35.4 12.4 15.9 22.0 5.7 9.2 37.7 2011 6.4 9.9 35.4 12.1 15.6 22.0 5.4 8.7 37.7 2012 6.1 9.4 35.4 11.9 15.2 22.0 5.1 8.2 37.7 a WTO Definition.

Source: WTO Secretariat estimates based on data provided by China.

4. Table A.3 shows the market access opportunities in China for Pakistan's top 25 exports, which in 2004-2006 accounted on average for 54.3% of Pakistan's global exports. The table shows at which year all HS 8-digit tariff lines corresponding to the product definition (i.e. applying to the 6-digit HS code used to capture the volume of trade) will become duty-free in China.

5. Pakistan's top 25 exports cover a total of 57 HS 8-digit tariff lines. None of Pakistan's top 25 exports already benefited from zero MFN duties in China's market: in 2007, 11 products (accounting for 29 tariff lines and 23.9% of Pakistan's average global exports) gain immediate duty-free access; and two products are granted duty-free access in 2008. Twelve products, including certain textiles and clothing articles, petroleum oils and rice (the latter is Pakistan's top export product), are excluded from tariff liberalization. The margin of preference granted to Pakistan by China under the Agreement varies from 4 to 20 percentage points.

Table AI.3 – Market access opportunities under the agreement for Pakistan's top 25 exports Access Conditions to China's market Pakistan's top export products in 2004-2006 MFN (2007) Duty-free in Average Remain Share in MFN Number of Dutiable global applied dutiable HS number and description of the product 2007 2008 2010 exports rate tariff lines (%) (%) 100630 Semi-milled or wholly milled rice, 6.2 65.0 2 2 whether or not polished or glazed 630231 Other bed linen, of cotton 6.1 14.0 4 4 271019 Other petroleum oils and oils obtained 3.8 6.6 11 3 8 from bituminous minerals, crude 630260 Toilet linen and kitchen linen, of terry 3.6 14.0 2 2 towelling or similar terry fabrics, of cotton 610510 Men's or boys' shirts, knitted or crocheted, 3.3 16.0 1 1 of cotton 520512 Cotton yarn (other than sewing thread), 3.3 5.0 1 1 measuring less than 714.29 decitex but not less than 232.56 decitex 620342 Men's trousers, bib and brace overalls, 2.9 16.0 2 2 breeches and shorts, of cotton 520819 Woven fabrics of cotton, containing 85% 2.8 10.0 1 1 or more by weight of cotton, other fabrics 420310 Articles of apparel and clothing 2.4 10.0 1 1 accessories, of leather or of composition leather 521051 Woven fabrics of cotton, printed, plain 1.8 10.0 1 1 weave 570110 Carpets and other textile floor coverings, 1.6 14.0 1 1 of wool or fine animal hair 630210 Bed linen, knitted or crocheted 1.5 14.0 2 2 520532 Multiple (folded) or cabled yarn, 1.5 5.0 1 1 measuring per single yarn less than 714.29 decitex but not less than 232.56 decitex 521213 Other woven fabrics of cotton, weighing 1.5 10.0 1 1 not more than 200 g/m2, dyed

WT/REG237/1 Page 19

Access Conditions to China's market Pakistan's top export products in 2004-2006 MFN (2007) Duty-free in Average Remain Share in MFN Number of Dutiable global applied dutiable HS number and description of the product 2007 2008 2010 exports rate tariff lines (%) (%) 630232 Other bed linen, of man-made fibres 1.4 16.0 2 2 610910 T-shirts, singlets and other vests, knitted 1.3 14.0 1 1 or crocheted, of cotton 950662 Balls, other than golf balls and table-tennis 1.3 12.0 2 2 balls, inflatable 630710 Floor-cloths, dish-cloths, dusters and 1.2 14.0 1 1 similar cleaning cloths 520522 Cotton yarn (other than sewing thread), 1.1 5.0 1 1 measuring less than 714.29 decitex but not less than 232.56 decitex 521031 Woven fabrics of cotton, dyed, plain 1.1 10.0 1 1 weave 901890 Other instruments and appliances used in 1.0 4.0 9 9 dental sciences 620462 Women's trousers, bib and brace overalls, 1.0 16.0 1 1 breeches and shorts, of cotton 420329 Other articles of apparel specially 0.9 20.0 2 2 designed for use in sports 520511 Cotton yarn (other than sewing thread), 0.9 5.0 1 1 measuring 714.29 decitex or more (not exceeding 14 metric number) 630239 Other bed linen, of other textile materials 0.8 14.0 5 5 Total of above 54.3 57 29 4 3 21

Source: WTO estimates based on data provided by China and UNSD, Comtrade data.

6. Like Table A.3, Table A.4 shows the market access opportunities in Pakistan for China's top 25 exports (at the HS 6-digit level), which accounted on average for 26.5% of China's exports to the world in 2004-06. The table shows at which year all HS 8-digit tariff lines corresponding to the product definition (i.e. applying to the 6-digit HS code used to capture the volume of trade) will become duty-free in Pakistan.

7. China's top 25 exports cover a total of 78 HS 8-digit tariff lines. Five of China's top 25 exports (which account for 18 HS 8-digit lines and 6.9% of China's average global exports in the period 2004-06) already benefit from zero MFN duties in Pakistan's market; none is subject to immediate duty-free access in 2007; and three products are granted duty-free access in 2010. Seventeen of China's top 25 export products (which account for 37 HS 8-digit lines and 16.6% of China's average global exports) are excluded from tariff liberalization under the Agreement.

Table A.4 – Market access opportunities under the agreement for China's top 25 exports Access Conditions to Pakistan's market MFN (2007) China's top export products in 2004-2006 Number of tariff Duty-free in Average lines Remain Share MFN Dutiable in applied Duty- HS number and description of the product global rate Dutiable 2007 2010 free exports (%) (%) 847130 Portable automatic data processing 3.8 0.0 3 machines, weighing not more than 10 kg 851770 Facsimile machines and teleprinters, parts 2.2 10.0 1 1 852990 Parts suitable for use solely or principally 2.0 15.0 3 1 2 with the apparatus of headings 85.25 to 85.28, other than aerials and aerial reflectors Table A.4 (Cont'd)

WT/REG237/1 Page 20

Access Conditions to Pakistan's market MFN (2007) China's top export products in 2004-2006 Number of tariff Duty-free in Average lines Remain Share MFN Dutiable in applied Duty- HS number and description of the product global rate Dutiable 2007 2010 free exports (%) (%) 851762 Machines for the reception, conversion and 1.5 7.1 7 1 1 5 transmission or regeneration of voice, images or other data 901380 Liquid crystal devices, other devices, 1.3 5.0 1 1 appliances and instruments 847170 Automatic data processing machines and 1.2 0.0 7 units thereof, storage units 844399 Parts and accessories other than printing 1.2 4.2 1 5 1 4 machinery used for printing by means of plates, cylinders and other printing components of heading 84.42 851761 Base stations 1.1 20.0 1 1 852190 Video recording or reproducing apparatus 1.0 20.0 2 2 other than magnetic-tape type 847330 Parts and accessories of the machines of 0.9 0.0 3 heading 84.71 852580 Television cameras, digital cameras and 0.9 8.3 6 2 4 Video camera recorders 950300 Tricycles, scooters, pedal cars and similar 0.9 15.0 5 1 4 wheeled toys; dolls carriages; dolls; other toys; reduced-size ("scale") models and similar recreational models 851712 Telephones for cellular networks or for 0.8 13.3 1 2 2 other wireless networks 852560 Transmission apparatus incorporating 0.8 7.5 8 2 6 reception apparatus 860900 Containers (including containers for the 0.7 10.0 1 1 transport of fluids) 853400 Printed circuits. 0.7 20.0 1 1 850440 Other transformers, static converters 0.7 13.3 3 3 844332 Letterpress printing machinery, other, 0.7 0.7 6 1 1 capable of connecting to an automatic data processing machine or to a network 844331 Machines which perform two or more of the 0.7 5.0 1 1 functions of printing, copying or facsimile transmission 640399 Footwear with outer soles of leather, and 0.6 25.0 1 1 uppers which consist of leather straps across the instep and around the big toe other than those covering the ankle 611030 Jerseys, pullovers, cardigans, of man-made 0.6 25.0 1 1 fibres 640299 Other footwear with outer soles and uppers 0.6 25.0 1 1 of rubber or plastics, other than those covering the ankle 852290 Parts and accessories suitable for use solely 0.5 5.0 1 1 or principally with the apparatus of headings 85.19 to 85.21 847160 Input or output units, whether or not 0.5 0.0 4 containing storage units in the same housing 852851 Video monitors, of a kind solely or 0.5 0.0 1 principally used in an automatic data processing system of heading 84.71 Total of above 26.5 26 52 2 13 37

Source: WTO estimates based on data provided by Pakistan and UNSD, Comtrade data.

______