Survey on Strengthening Bilateral Economic Relationship Between Pakistan and Japan FINAL REPORT

Survey on

Strengthening Bilateral Economic Relationship between

Pakistan and Japan

FINAL REPORT

February 2019

Ministry of Economy, Trade and Industry

International Development Center of Japan Inc.

(IDCJ)

CONTENTS Chapter 1 Overview of Pakistan’s Economy ...... 1 1-1 Macro Economy ...... 1 1-2 Industry...... 2 1-3 Trade ...... 4 1-4 Inward Foreign Direct Investment ...... 6 Chapter 2 Pakistan’s Business Environment ...... 8 2-1 Government Organization ...... 8 2-2 Business-related Acts ...... 9 2-3 Approval and Authorization for Foreign Direct Investment ...... 10 2-4 Investment Policy ...... 11 2-5 Infrastructure ...... 14 2-5-1 Electric Power ...... 14 2-5-2 Railways ...... 15 2-5-3 Road ...... 16 2-6 IT Industry in Pakistan ...... 18 Chapter3 Requests and Proposals from Pakistan for Strengthening Economic Relationship ...... 21 3-1 Trade ...... 21 3-2 Investment Promotion ...... 22 Chapter4 Business Environment in Pakistan from the Viewpoint of Japanese Companies ...... 25 4-1 Survey Method...... 25 4-2 Survey Analysis...... 26 4-2-1 Analysis of Attractiveness and Competitive Advantage ...... 26 4-2-2 Analysis of Promising Industries, Investment Decisive Factors, and impediment Factors ...... 28 4-2-3 Analysis of Trade Opportunities...... 32 4-2-4 Identification of Recognition Gap on Business Environment and Factor Analysis ...... 36 4-3 Comparative Examples on Business Environment in Pakistan ...... 38 4-3-1 Ranking in “Ease of Doing Business 2019” by the World Bank ...... 38 4-3-2 Ranking in Global Competitive Index 2018 by World Economic Forum...... 40 Chapter 5 Measures for Strengthening Bilateral Economic Relationship ...... 42 5-1 Improvement of Investment Environment ...... 42 5-1-1 Overview of Investment Environment ...... 42

5-1-2 Extraction of Issues ...... 43 5-1-3 Identification of Items to be Improved and Suggestions for Improvement ....45 5-2 Improvement on Strengthening Bilateral Trade Relationship ...... 50 5-2-1 Overview of Bilateral Trade ...... 50 5-2-2 Extraction of Issues ...... 51 5-2-3 Identification of Items to be Improved and Suggestions for Improvement ....53 5-3 Possibilities of FTA ...... 59 5-3-1 Japan’s FTAs ...... 59 5-3-2 Pakistan’s FTAs ...... 61 5-3-3 Possible Impact of FTA on Japanese and Pakistani Economies ...... 71

Chapter 1 Overview of Pakistan’s Economy 1-1 Macro Economy Pakistan launched "Vision 2025" in May 2014, a mid- to long-term growth strategy consisting of three stages: Pakistan aims at becoming among world's top 25 countries in terms of the economic scale by 2025, becoming one of the global leaders in important sectors by 2035, and becoming among the world's top 10 countries being a member of developed country in 2047. Even though there was a change of government, new policy has not been launched. Pakistan’s population is exceeding 200 million people, of which the population under the age of 30 accounts for 60% of the overall population; in other words, Pakistan has a high economic potential. In 2017, Pakistan’s GDP is US $ 304.95 billion and per capita GDP is US $ 1,541.1.

Table 1-1 Pillars of Pakistan Vision 2025 １．Developing human capital and social development ４．Energy, Water & Food Security ・Realize 100% enrollment rate of primary education. ・Double the total domestic power generation capacity to ・Expand enrollment rate of higher education from 7% to 12%. 45,000 MW. ・Expand the proportion of public health eligible population ・Improve electrification rate from 67% to 100%. from 48% to 90%. ・Reduce the population facing food insecurity from 60% to 30%. ２．Achieving sustained, indegenous and inclusive growth ５．Private Sector & Entrepreneurship Led Growth ・Modernize the public sector for the provision of efficient and ・Rank in the top 50 countries on the World Bank's Ease of Doing effective civil services Business rankings. ・Become one of the largest 25 economies in the World. ・Expand private investment from overseas to over $ 40 billion. ・Increase export value from $ 25 billion to $ 150 billion. ６．Developing Competitve Knowledge Economy through ３．Democratic Governance, Institutioal Reform & Value Addition Modernization of Public Sector ・Improve Productivity ・In the governance index of the World Bank, each item such as ・Improve Pakistan’s score on the World Bank Institute’s political stability, nonviolence / terrorism, and corruption is Knowledge Economy Index from 2.2 to 4.0. improved to the top 50% in the world. ７．Modernizaing Transportation Infrastructure & Greater Regional Connectivity ・Positioned as a regional trade and commercial hub. ・Expand the road from 32 km to 64 km per 100 km2, and expand the proportion of mode of railways in logistics from 4% to 20%.

Pakistan achieved GDP growth rate of 5.8% in 2018 (July 2017/ June 2018), which is the highest in the past 13 years. Pakistan maintained a low level of inflation of 3.9% and achieved inflation targets for four consecutive year. This in turn led to the credit expansion in private sector. High economic growth rates are mainly due to domestic consumption and low interest rates, additional fiscal expenditure, and the improvement of real income also supported high economic growth. On the other hand, trade deficits tend to expand due to the rapid increase in imports caused by high domestic demand, causing a decrease in foreign reserves almost by half from US$ 14.1 billion at the end of 2017 to US$ 7.3 billion at the end of 2018. Normally, foreign exchange reserves are required for three months of monthly imports, but the level remained below two months of monthly imports. In order to curve the increase in imports, Pakistani government imposed Regulatory Duties (RD) on

1 luxury items in October 2017. Thereafter, State Bank of Pakistan issued Foreign Exchange Circular No.06 of 2018, stating that advance payment for imports is basically not allowed.1。 The budget deficits in 2018 reached the all-time high in the past five years, and the public debt has been increasing significantly. According to the IMF, public debt of emerging countries is considered to reach a dangerous level when the rate of public debt exceeds 70% of GDP. However, the rate of Pakistan exceeded 72.5% of GDP in 20182. In 2018, Pakistan requested financial assistance to the IMF, Saudi Arabia, and China. Saudi Arabia agreed in October 2018 to provide Pakistan with a package equivalent to US $ 6 billion. Pakistan has received financial assistance from IMF 13 times in the past. Most recently, in September 2013, Pakistan received from the IMF Extended Credit Facility (EFF) of 6.6 billion dollars for three years.

Table1-2 Macro Indicators FY15 FY16 FY17 FY18 Target Result Growth Rate（％） Real GDP Growth Rate 4.1 4.6 5.4 6.0 5.8 Agriculture 2.1 0.2 2.1 3.5 3.8 Industry 5.2 5.7 5.4 7.3 5.8 Service 4.4 5.7 6.5 6.4 6.4 Credit to Private Sector 5.9 11.2 16.8 - 14.9 CPI 4.5 2.9 4.2 6.0 3.9 Percentage of GDP（％） Current Account -1.0 -1.7 -4.1 -2.6 -5.8 Fiscal Balance -5.3 -4.6 -5.8 -4.1 -6.6 Public Debt 63.3 67.6 67.0 61.4 72.5 Source: SBP

1-2 Industry The textile industry is a pillar industry in Pakistan, and in 2017 the export value of textiles and clothing accounts for 59.4% of all export items. In addition, there exists industrial cluster of the automobile industry. After Automotive Development Policy (ADP) was launched, domestic production of automobiles has been promoted by attracting new foreign-owned car manufacturers. With respect to the service industry, Pakistan now attempts to promote IT industry as an emerging industry. In 2018, the share of GDP in each sector is 18.9% in agriculture, 20.9% in industry and 60.2% in service, respectively. Compared to ten years ago, the share of agricultural sector has decreased from 22.6% in 2009, whereas the share service sector has been on an upward trend from 56.6% in 2008. Meanwhile, the share of industry in GDP has basically remained unchanged.

1 http://www.sbp.org.pk/epd/2018/FEC6.htm 2 IMF「Fiscal Monitor 2018 April」

The growth rate of the service sector has been stable since 2009, but that of industry and agriculture fluctuates significantly. With respect to sector’s contribution to GDP growth rate of 5.8%, contribution of service sector is the highest of all sectors and accounts for 3.9% whereas agricultural and industrial sector accounts for 0.7% and 1.2% (of which manufacturing industry accounts for 0.84%), respectively. Agriculture achieved a growth rate of 3.8% in 2018, exceeding the target of 3.5% owing to the high growth of sugarcane, rice and cotton production. In the industrial sector, the production of mining, coal, lime and bauxite drove the growth rate. In the manufacturing sector, small and medium enterprises maintained the same growth rate as the previous year, whereas the large manufacturing industry (LSM: Large-scale Manufacturing Sector) exceeded the growth rate of the previous year. Growth rate was spectacular in the industries such as petroleum (10.6%), cement (11.1%), automobile (19.5%), steel (13.9%) and electronics (38.8%). Regarding subsector of the service sector, growth rate of wholesale and retail sector was 7.5 % year on year and attained the highest growth since 2007.

Figure 1-1 GDP by sector (in percentage) Source：Pakistan Bureau of Statistics

Figure 1-2 Growth Rate by Sector Source：Pakistan Bureau of Statistics

1-3 Trade In 2017, Pakistan’s trade deficits further expanded to US $ 35.6 billion. In recent years, the trade deficit tends to expand possibly due to the FTA with China and the imports of capital goods through China Pakistan Economic Corridor (herein referred to as CPEC); however, it is said that imports of low-cost capital equipment support Pakistan’s local industry, especially textile and cement through technological upgrading and improvement of infrastructure3. Imports have increased by 22% year-on-year from US $ 47 billion in 2016 to US $ 57.4 billion in 2017. This is because, in addition to the increased imports of petroleum, machinery, metals, and chemicals, commodity prices of oil and steel rose. Consequently, the import value is 2.6 times higher than the export value. Exports tended to decline in recent years, from US $ 25.3 billion in 2011 to US $ 20.5 billion in 2016; however, the situation turned around in 2017 and exports rose to US $ 21.9 billion. This was due to the improvements in domestic energy supply and commodity prices in international markets. CPEC is primarily focused on infrastructure development centered on power plants and the like, and imports of capital goods such as machinery and transport equipment have been increasing significantly. The IMF states that CPEC may have the positive effect of reducing Pakistan’s excessive dependence on oil, improving productivity and boosting economic growth by realizing a stable supply of electricity. However, at the same time, the repayment of loans, the repatriation of profits, and the imports of fuel necessary for the CPEC projects might worsens the trade balance. It is expected to reach the peak of trade deficit with a range of US$ 35 to 45 billion in 2024/20254。 In 2017, the United States is the largest market for Pakistan. The U.K. follows next and China ranks the third largest market for Pakistan. Meanwhile, China ranked first in terms of imports. The UAE is the second, and Indonesia is the third largest country for Pakistan’s imports. Japan ranked 22nd for Pakistan’s market and ranked 6th as its import partner.

3 “Dynamic of Pakistan’s Trade Balance with China”, Junaid Kamal, Manzoor Hussain Malik, SBP Staff Notes 4 IMF Country Report No.17/212, July 2017

Figure1-3 Pakistan’s Trade from 2007 to 2017 Source：ITC TRADE MAP

Table1-3 Pakistan’s Top 5 Markets and Import Partners（2017）

Export Partners US$ billions Import Partners US$ billions US 3.6 16.3% China 15.4 26.8% UK 1.6 7.5% UAE 7.5 13.1% China 1.5 6.9% US 2.8 4.9% Afghanistan 1.4 6.4% Indonesia 2.6 4.5% Germany 1.3 5.9% Saudi Arabia 1.8 3.2% Others 12.5 57.1% Others 27.3 47.5% Total 21.9 100% Total 57.4 100%

Source：The World Bank WITS

1-4 Inward Foreign Direct Investment In 2018, China made the largest investment with US$ 1.8 billion in Pakistan, 49.6 % increase year- on-year, accounting for 58.6% of all inward direct investment. The U.K. ranked the second, investing US$ 300 million with an increase of 42.5% over the previous year. Investment from Japan is US $ 60 million, increase of 3.6% over the previous year. Electric power is the largest investment sector, totaling US$ 997million with an increase of 42.4% year-on-year. This is mainly because CPEC has implemented a large number of electric power development projects. Also, construction sector increased by 52%, amounting to US$ 710 million. In addition, as a large-scale project, Edotco, an affiliate of Malaysia's major telecommunications giant Axiata Group, announced that it would purchase a subsidiary of PMCL, Pakistan’s major telecom carrier, for US$ 940 million. In terms of consumer goods, a major Dutch consumer company, Unilever, announced in March 2018 to invest US$ 120 million for the expansion of its factory in Pakistan. In April 2018, CCI Pakistan, bottler of a major American company Coca Cola, invested US$ 4.5 million and established a new factory. In the non-manufacturing industry, German IT company, rocket Internet, announced in May 2018 that it sold all the shares of "Dollars", the Internet communication venture established in Pakistan in 2012, to a Chinese internet giant, Alibaba.

Figure 1-4 Inward Foreign Direct Investment by country（2009/2010～2017/2018） Source：SBP Website

Table 1-4 Inward Foreign Direct Investment by Sector

（US$ million,％） FDI in Pakistan 2016/17 2017/18 (provisional) Net FDI Net FDI % Growth Electricity 700 997 32.2 42.4 Thermal 403 787 25.4 95.2 Hydro 207 129 4.2 △ 37.9 Construction 466 709 22.9 52.0 Finance 296 400 12.9 35.2 Oil and Gas Exploration 146 193 6.2 31.9 Food 526 93 3.0 △ 82.4 Trade 33 143 4.6 332.0 Transportation 58 57 1.8 -1.8 Transport Equipment 59 66 2.1 11.5 Total （including others） 2,747 3,092 100.0 12.6

Source：SBP Website

Chapter 2 Pakistan’s Business Environment 2-1 Government Organization Private sector and entrepreneurship-led growth is positioned as the fifth pillar in "Vision 2025". Government's role is to develop an institutional reform framework that is beneficial to creating a business friendly, secure, transparent, and level playing field for private sector development, together with policy and regulatory regimes that incentivize investment more efficiency, Ministry of Commerce (MOC) is in charge of trade whereas Board of Investment (BOI) is responsible of investment. In addition, the Federal Board of Revenue (FBR) assumes responsibility for income tax, sales tax, excise tax, import and export duties, etc. The State Bank of Pakistan (SBP) takes charge of foreign exchange and regulations. MOC has jurisdiction over the regulation of commercial activities such as importing and exporting. Also, MOC is the organization that negotiates and signs FTA with other countries. As a subordinate body of MOC, National Tariff Commission handles rationalization of tariffs and elimination of exceptional tariffs. It also possesses authority and investigation functions on tariff measures such as anti-dumping, countervailing tariffs and safeguards. Moreover, based on requests from Pakistani exporters, National Tariff Commission investigates and copes with WTO related issues. As another subordinate body of MOC, Trade Development Authority of Pakistan (TDAP) promotes trade by organizing exhibitions in Pakistan and overseas, analyzes overseas markets, and draft a trade policy. BOI formulates investment policy and provides a series of facilitations such as receiving applications, giving permission and approval on incentives in SEZs. Also, BOI gives approval for the establishment of foreign representative offices and branch offices, facilitates such procedures as work permit, negotiates and drafts a bilateral investment agreement, and take various measures for improving investment climate. Counterpart of Chinese government for CPEC is Ministry of Planning and Development (MOIP) but BOI takes initiatives in SEZs. Securities & Exchange Commission of Pakistan (SECP) has jurisdiction over Corporate Law and other related laws and is in charge of approval of the establishment of local subsidiary companies. (See Table 2-1）. Export Processing Zones of Authority (EPZA) under Ministry of Industry and Production (MOIP） is in charge of Export Processing Zone (EPZ). EPZA promotes exports of companies in EPZ through incentive measures such as exemption of import duties.

Table 2-1 Establishment of Local Subsidiary Form of Organizatio Scope of Activities Procedures company n in Charge i) approval of BOI and other ministries, ii) Overseas capital payment, iii) application to SECP, iv) Commercial affiliated SECP approval of Central Bank, v) tax number Activities company registration, and vi) local administrative procedures Activities on Branch office contract basis are BOI i) approval of BOI and ii) registration at SECP permitted. Only survey is allowed. Representative (Commercial BOI i) Approval of BOI and ii) registration at SECP office Activities are not allowed） 1-2 months Application of （Online i) approval of BOI, and ii) approval of Ministry BOI Work permit application is of Interior acceptable） Source：JETRO, JICA, BOI website

2-2 Business-related Acts Acts related with investment are as follows:5  Special Economic Zone（SEZ Act 2012）： (Amendment in 2016) ➢ One-time exemption from all custom-duties and taxes on plant and machinery imported into Pakistan (Section 37 a) ➢ Exemption from all taxes on income for enterprises commencing commercial production by the thirtieth June 2020, in the SEZs for the next ten years (Section 37 b)

 Income Tax Ordinance (2001), Division II of Part 1 ➢ The rate of tax as specified in Division II of Part 1 of the First Schedule shall be reduced to 20% for a company setting up an industrial undertaking between the first day of July, 2014 to the thirtieth day of June, 2017, for a period of five years beginning from the month in which the industrial undertaking is set up or commercial production is commenced whichever is later: Provided that fifty percent of the cost of the project including working capital is through owner equity foreign direct investment. (Section 18)

 Income Tax Ordinance (2001), 65B. Tax credit for investment ➢ Tax credits equivalent to 10% or 20% of the costs incurred by newly established factories, equipment machinery, etc. are given. It is possible to carry forward for 2 to 5 years.

5 JETRO ウェブサイト参照

➢ Conditions: For plants / machines purchased / installed for the purpose of business expansion, facility replacement between July 1, 2010 and June 30, 2021.

 Income Tax Ordinance (2001) 65D ➢ A fixed percentage of tax credits are paid out of corporate taxes paid for 5 years. Percentage is calculated as corporate tax amount * (the amount of new stock issuance for immediate cash consideration / total investment amount). ➢ A company that was established (stock registration and production start) between 1 July 2011 and 30 June 2021 and invested at a borrowing ratio of 30% or less.

 Income Tax Ordinance (2001) 65E ➢ Where a taxpayer being a company, setup in Pakistan, invests any amount, with new equity raised through issuance of new shares, in the purchase and installation of plant and machinery for an industrial undertaking, for the purpose of the expansion of plant and machinery already installed therein or a new project, a fixed rate of tax credit is given to the project cost, for a period of five years beginning from the date of setting up or commencement of commercial production for the new plant or expansion project. ➢ The amount of a person‘s tax credit allowed for a tax year shall be computed according to the following formula：A*(B/C) where A (the amount of tax assessed to the person for the tax year before allowance of any tax credit for the tax year), B (the equity raised through issuance of new shares for cash consideration) and C (the total amount invested in the purchase and installation of plant and machinery for the industrial undertaking). ➢ Where a taxpayer maintains separate accounts of an expansion project or a new project the taxpayer shall be allowed a tax credit equal to one of the tax payable, including minimum tax and final taxes payable under any of the provisions of this Ordinance, attributable to such expansion project or new project ➢ Tax credit shall apply when a company established in Pakistan before July 1, 2011 utilizes capital obtained by issuing new shares (borrowing ratio is 30% or less) and establish a factory or purchasing equipment for the expansion of project for a new plant and purchase and installation of plant and machinery from July 1, 2011 to June 30, 2021.

2-3 Approval and Authorization for Foreign Direct Investment Almost all business sectors are open to foreign direct investment in Pakistan, yet the investors need approval from Pakistani government for the fields below: (i) weapons and explosives, (ii) high- performance explosives, (iii) radioactive substances, (iv) securities, currency, and money printing, and (v) manufacturing of alcoholic beverages and alcoholic beverages, excluding their industrial use.

In agriculture sector, 100% foreign capital is allowed only in the case of establishing Corporate Agricultural Farming based on Corporate Law. In other agricultural fields, share of foreign capital is limited to up to 60%. Basically, 100% foreign capital is permitted in the service sector, but in the case of finance, insurance and airline companies, the investment ratio of foreign capital is limited to up to 49%. Regarding the minimum investment amount, there is no limitation in all sectors. In service sector, foreign capital previously had to pay US$ 150,000 regardless of what percent of capital participation, yet it was abolished by the investment policy announced in February 2013.

Table2-2 Pakistan’s Foreign Investment Policy Non Manufacturing Service Manufatruing Agriculture Infrastructure （including IT） Unnecessary Necessity of Approval Unnecessary except probimited of Government licenses of relevant authority are required industries 100％ Equity of Foreign （except agriculture, 100% 100% 100% Capital airlines, Media and Banking） Mimimun Investment Nothing Nothing Nothing Nothing

Limit of Repatriation Nothing Nothing Nothing Nothing of Profits and Dividend

Tariff rate on equipment which is 5% 0 5% 0-5％ not manufactured in Pakistan Initial Depreciation Rate for Machinery 25% 25% and Equipment Limit of Remittance of Follow guidelines. Lump sum payment up to Royalties and Nothing 100,000 dollars (upper limit) for the first 5 years. Technical Fees Up to 5% of net sales. Source: BOI, JETRO website

2-4 Investment Policy 2-4-1 Incentives in Special Economic Zones (SEZs) 1) Incentives SEZ Act Section 37 stipulates incentives for companies investing in Pakistan.  One-time exemption from custom-duties and taxes on import of plant and machinery into SEZ expect items listed under Chapter 87 of Pakistan Custom Tariff.  Companies that commence commercial production by June 30, 2020 are exempted from all taxes

on income for the next 10 years, and companies that start production after the date shall be exempted from taxes on income for the next 5 years.  Enterprises must commence commercial activities within 24 months from the date of approval.

2) Existing Special Economic Zones (SEZs) There are currently eight Special Economic Zones (SEZs) with 7,847 acres in Pakistan: (i) Khaipur SEZ, (ii) Bin Qasim SEZ, (iii) Korangi Creek SEZ, (iv) Hattar SEZ, Phase VII, (v) Quaid e Azam Apparel Park, (vi) M-3 Industrial City, (vii) Value Added City6。BOI aims at attracting companies through measures such as incentives and one stop service. However, its infrastructure issues remain unsolved and there exist issues such as lack of gas, electric supply and unavailability of DSL. Table 2-3 shows features of each SEZ.

Table 2-3 Existing Special Economic Zones (SEZs）（ 2018） Sectio Section SEZ Province Acres Main Industries n sold

1 Khaipur SEZ Sindh 140 Agricultural processing 85 69

Light engineering, automobile, steel, 717 2 Bin Qasim SEZ Sindh 930 chemical, pharmaceutical, and 541 Acres electronical appliances Consumer goods, food, pharmaceutical, Korangi Creek garment, textile, light engineering, 240 3 Sindh 240 85 SEZ packaging and printing, warehouse, and Acres logistics Hattar SEZ, 4 KP 424 Mineral, marble, and food processing 318 274 Phase VII Quaid e Azam 5 Punjab 1,536 Textile and cotton 494 N/A Apparel Park Textile, engineering, construction, M-3 Industrial 6 Punjab 4,356 chemical, pharmaceutical, electronics, 576 476 City food and beverage, and IT Value Added Textile, chemical, pharmaceutical, 7 Punjab 225 128 128 City engineering, and IT Source: BOI website

In addition to the existing SEZs, there is an ongoing plan to establish nine SEZs in the CPEC framework. Iron steel, petrochemical, textile, agriculture, and mining and mineral are prioritized industries for Chinese SEZs. Proposed SEZs are (i) Rashakai SEZ, (ii) China SEZ, (iii) Boston Economic Zone, (iv) Allama Iqbal SEZ, (v) ICT Model SEZ, (vi) Industrial Park on Pakistan Steel Land at Port Qasim, (vii) Mirpur SEZ, (viii) Mohmand Marble City, and (ix) Maqpoondas SEZ. Table

6 http://www.invest.gov.pk/ViewNews.aspx?NID=2589

2-4 illustrates features of each SEZ.

Table 2-4 SEZs in the of CPEC Framework（2018） SEZ Province Acres Main Industries Status

Fruit, food, packaging, textile F/S completed, land 1 Rashakai SEZ KP 1,000 sewing, and knitting obtained

China Special Sindh To be decided at the stage of 2 1,000 F/S in preparation Economic Zone （Dhabeji） F/S

Fruit processing, agricultural equipment, pharmaceutical, Boston Economic bike assembly, chromium, 3 Balochistan 1,000 200 acres developed Zones cooking oil, ceramic, frozen warehouse, electronic equipment, and halal food F/S completed, land Textile, iron, pharmaceutical, Punjab obtained, under engineering, chemical, food 4 Allama Iqbal SEZ （Faisalabad 3,000 construction next to processing, plastic, agricultural ） M-3 Industrial City equipment etc. SEZ Federal Iron, food processing, Government 200- 5 ICT Model SEZ pharmaceutical, printing and· To be determined （Islamabad 500 packaging and light engineering ） Steel, automobile, Land obtained. Industrial Park on Federal pharmaceutical, chemistry, Transferred from 6 PS land at Port Government 1,500 printing and packaging, Pakistan Steel Mill to Qasim （Karachi） garment, etc. NIP

Mirpur Industrial Land obtained. F/S in 7 AJ&K 1,078 Various industries Zone preparation

Completed Mohmand Marble 8 FATA 350 Marble, and others （expansion in City schedule） Marble and granite, ore processing, fruit processing, 9 Maqpoondas SEZ GB 250 F/S completed steel, mineral processing and leather Source: BOI and CPEC website AJ&K: Azad Jammu and Kashimir, FATA: Federally Administered Tribal Areas

2-4-2 Incentives for Export Processing Zones 1) Incentives In the case of export-oriented companies, EPZ’s incentives and infrastructure with 30 year lease term are more favorable than SEZ.  Duty-free import of machinery, equipment and materials.  Presumptive tax: companies can substitute corporate tax if they pay 1% of export value (FOB).

 Domestic market available to the extent of 20% of sales if they pay tariffs.  Obsolete/old machines can be sold in domestic market of Pakistan after payment of applicable duties & taxes  National import regulations not applicable  No sales tax on input goods including electricity/gas bills  Exchange control regulations of Pakistan not applicable

2) Existing Export Processing Zones (EPZs) There are currently four existing Export Processing Zones, namely Karachi EPZ, Risalpur EPZ, Sialkot EPZ and Gujranwala EPZ, all of which are managed by the Export Processing Zone Authority (EPZA) under Ministry of Industries and Production. There are other EPZs, such as the Sandak copper and gold mine development project, yet they are rather projects than industrial parks. Karachi EPZ is located at a distance of 18 km from Jinnah International Airport and 10 km from Port Qasim and is the first EPZ in Pakistan with an area of 305 hectares (Phase 1 and Phase 2). There are 263 companies operating in the EPZ in 2016. They are mostly local companies and the share of textile companies account for 75% of all companies. Sialkot EPZ has a high potential with abundant skilled workforce in such industries as surgical instruments, sporting goods, leather goods. Out of 881 sections in the EPZ, 95% of the sections is already being occupied The Risapur EPZ is located close to Central Asia markets such as Afghanistan, Iran and other Central Asian countries, and thus has a potential in trade and warehousing business, food processing, carpets and furniture, minerals and others. Gujranwala EPZ features light engineering and cutlery industries7.

Table 2-5 Existing Export Processing Zones（EPZs） EPZ Year Acres Features

Karachi EPZ 1981 305 IT/Precision Engineering/High-Value Garments/Gems & Jewelry

Sialkot EPZ 2002 92 Surgical/Sports Goods/Leather Goods.

Risalpur PZ 2005 238 Trading-Warehousing / Furniture / Engineering.

Gujranwala EPZ 2013 113 Light Engineering / Consumer Durables.

Source: EPZA website

2-5 Infrastructure 2-5-1 Electric Power Electricity generation capacity exceeded 26 million kW in FY2015 / FY2006. As for the energy mix, thermal power generation accounts for 66%. There are 21 projects in the energy support project in CPEC, totaling US$ 26.37 billion. These projects include assistance for coal-fired power generation,

7 https://content.pk/pakistan/export-processing-zones-in-pakistan/

14 hydroelectric power generation, solar power generation, and wind power generation and transmission lines. There are 8 coal-fired power projects and the amount of investment is US$ 15.79 billion, accounting for 60% of the total energy projects. The total output is as large as 9.54 million kW, accounting for 69% of the total output. The ratio of coal-fired power generation is expected to increase further in the future 8. Table 2-6 Generating Capacity

1999/0 2009/1 2014/1 2015/1 CAGR 0 0 5 6

Generation Thermal 1244 1332 1554 1732 2.1

Capacity Hydro 483 656 703 712 2.5

（10,000kw） Other Renewable Energy - - 44 81 -

Nuclear 14 46 75 109 13.8

TOTAL 1741 2034 2376 2634 2.6

Output Thermal 4606 6437 7849 3.4

（100 million Hydro 1929 2851 3247 3.7

kWh） Other Renewable Energy - - 99 15.9

Nuclear 40 289 421 3.7

TOTAL 6575 9577 11616 4.3

Source: IEA

Generation Capacity Electricity Output Figure 2-1 Pakistan’s Energy Mix（2015/2016）

2-5-2 Railways Imported charcoal in Pakistan is transported by state-owned Pakistan Railways. Pakistan Railways belongs to the Ministry of Railway of the Federal Government and the total length of all routes is

8 http://cpec.gov.pk/energy

11,881 km. Pakistan utilizes US$ 8.4 billion from CPEC loan in order to speed up and upgrade transport capacity of railways. This will facilitate efficient transportation of coal for thermal power plants9. 2-5-3 Road Total road length in Pakistan is 261,595 km, and the length of trunk roads including the expressway is 12,131 km. The National Highway Authority (NHA) under the Ministry of Communications has jurisdiction over these national highways, motorways, strategic roads, and highways, being responsible for the planning, promotion, and implementation of projects for construction, development, operation, repair and maintenance of these roads. 5 routes totaling 996 km will be developed by CPEC, two of which have already been under construction.

Table 2-7 Pakistan’s road network under NHA (Km)

Total Roads in Pakistan 261,595 Total of NHA Roads 12,131 - National Highways 9,489 - Motorways 2,280 - Strategic Roads 262 - Expressways 100 Source: JICA

CPEC was kicked off in April 2015 when Xi Jinping visited Pakistan and signed 51 projects. With financial assistance from China, CPEC is said to be a huge investment with US$ 46 billion. CPEC will connect 2,700 km of railway, highway and pipeline from Gwadar Port of Pakistan to Kashgar, Xinjiang Uygur Autonomous Region of China. However, the amount of investment may vary because some projects are still at the stage of review. The scope of cooperation in CPEC is: (i) industry, (ii) finance, (iii) agriculture, (iv) tourism, (v) education, (vi) human resources development, (vii) healthcare, (viii) people-to-people exchange, (ix) increase of livelihood opportunities, and (v) regional security and stability strengthening. CPEC projects will continue until 2030.

9 METI’s survey on the situation and efficient use of activated carbon in Japan (February 2019)

Table 2-8 Sector and Estimated Cost of CPEC (US$ million) Number of Sector Estimated Cost Estimated Cost Project 26,370 33,000 Energy 21 Generation Capacity： Generation Capacity： 13,810MW 17,045MW Infrastructure 5 5,341 5,341 (Road) Infrastructure 3 8,237 8,237 (Railways) Infrastructure 1 44 44 (Optical Fiber） Gwadar Port 12 793 10,000-14,000

Total 42 40,785 58,622

Source：CPEC & Pakistani Economy: An Appraisal by Dr. Ishrat Husain (April 2018)

2-6 IT Industry in Pakistan 2-6-1 Overview of IT Industry Pakistan's IT industry is growing, and there is a possibility of further expansion in the future. The current situation and outline of IT industry is as follows:

Table 2-9 Summary Information of IT Industry in Pakistan 5,000 companies (estimated 3,500 export-oriented + 1,500 domestic)

300,000+ IT & ITeS professionals with expertise in current and emerging IT products and

technologies

20,000+ IT graduates each year join the workforce

Export Revenue: $3.8 billion (includes ? billion earned by MSMEs & Freelancers)

Export Remittances: $831.35 million (151% increase over last 5 years @ CAGR of 20%)

Domestic Revenue: $1 billion

Exporting to 100+ countries

3rd most financially attractive country in the world for outsourcing services (A.T. Kearney’s

Global Services Location Index 2017)

3rd most popular country for freelancing (Oxford Internet Institute (OII), ‘Online Labour

Index’ 2018)

300+ international companies including Global enterprises like Bentley, Ciklum, IBM, Mentor Graphics, S&P Global, Symantec, Teradata, VMware etc. have established BPO support,

development & global consulting centers in Pakistan

Source: Pakistan Software Export Board(PSEB）

In order to promote the IT industry, the government of Pakistan approved several incentives for 15 years to the industry in 2001 to grow to more than USD 3 billion from the market size of USD30 million at that time. The main incentives for IT industry are as follows:

Table 2-10 Government Incentives for Pakistan's IT industry Zero income tax on IT & ITeS exports till June 2025

Zero Income tax, and no minimum tax and no withholding tax for PSEB registered IT start-ups for 3 years

Up to 100% foreign ownership of IT & ITeS companies

Up to 100% repatriation of profits for foreign IT & ITeS investors

Tax holiday for venture capital funds till 2024

Foreign currency account permitted for only receipt of export remittances (up to 35% can be retained in foreign currency)

Accelerated depreciation of 30% on computer equipment

Provision of low rent space in Software Technology Parks (STPs)

Source：PSEB

2-6-2 Software Development Software development is rapidly growing in Pakistan. IT companies are developing software for use in various kinds of businesses and services. Local-made software packages can be implemented at low cost in schools, hospitals, supermarkets and other companies, and large-scale control systems such as ERP can be used for manufacturing of textiles, medicines, foods and beverages. The increase in the use of Android smartphone, tablet, and Apple iPad has given a big boost to the mobile application development industry. According to the Pakistan Software House Association (PASHA), Pakistan's software development cost is about 20% lower than India, and price competitiveness is their strength. The top 5 Pakistani software exporters in 2018 are as follows:

Table 2-11 Top 5 Pakistani Software Exporters Rank Name of Company Main Areas of Expertise FY2018 1 NetSol Technologies Ltd Asset finance & leasing software

S&P Global Market Intelligence 2 Company Financial data analytics

3 Systems Limited IT consulting, ERP, BPO services

4 Ibex Global Solutions (Pvt) Ltd A TRG company providing BPO solutions & services Teradata Global Consulting 5 Pakistan (Pvt) Ltd Data analytics & global consulting services Source：PSEB

2-6-3 E-Commerce According to JETRO’s research report of "Pakistan's e-commerce market survey (March 2017)", Pakistan's e-commerce market size is estimated quoting the IT professional’s view such as "The current Pakistan e-commerce market size is USD100 million and it will grow to be an industry of USD10 billion in the next five years". According to PASHA's survey, Pakistan has 150 million mobile phone users, 53 million broadband users, and 36 million social media users for a population of 200 million. Although Pakistan has basic conditions to succeed in e-commerce, there is still a shortage of online platforms that are still mainly cash-based settlements and lack of online platforms that allow for all payment methods tailored to the region.

Many people living in urban areas of Pakistan are aware of the existence of e-commerce, since major e-commerce management companies such as Daraz, OLX, and others are developing advertising campaigns. The majority of people using online retail sites have chosen cash on delivery (COD) to pay for ordered items and the operating companies also provide cash on delivery (COD) as a payment method. Major e-commerce companies are Daraz, which was acquired recently by Alibaba in China, Kaymu, Foodpanda, Lumdi, Shophive, Homeshopping, Symbios, Rozee, Yayvo, Careem, Pakwheels, Olx, Tradekey, Tohfay, etc.

2-6-4 Support for startup Ignite (formerly National ICT R&D Fund) is a non-profit company owned by the Government of Pakistan and administered by the Ministry of Information Technology and Telecommunication. It provides grants to startups and innovate projects, operates incubators and digital skills training programs through private sector partners, commission studies that inform public sector policy and undertakes outreach to evangelize innovation and to spread awareness about its programs amongst industry, academia, media and policy makers. Ignite was established in 2007 and is funded by mobile telecom operators, landline telecom operators and internet service providers, ISP, in Pakistan by government mandate. Ignite already used investment funds of 2.9 billion rupees to provide incubation support to more than 141 startup companies, creating more than 890 jobs. In addition, there are an increasing number of companies investing in Pakistan's IT companies, according to PASHA, domestic and foreign major investors who made aggressive investment in the past 4 years are as shown below:

（

Figure 2-2 Major investors for IT companies in Pakistan Source：PASHA

Chapter3 Requests and Proposals from Pakistan for Strengthening Economic Relationship

The Government of Pakistan focused on bilateral trade and investment, and several requests and proposals on the economic relationship made by them were shown to the Japanese side in 2018. Pakistan's main requests and proposals on strengthening economic relationship are as follows:

3-1 Trade Regarding bilateral trade in 2017, Pakistan's export value to Japan is 216 million dollars, which is an increase of about 100 million dollars in comparison with the previous year of 123 million dollars in 2010, while Pakistan’s import from Japan increased by 700 million dollars from $ 1,594million dollars in 2010, to 2,293 million dollars in 2017. Pakistan’ s Ministry of Commerce has pointed out that the trade deficit with Japan has increased by more than 2,000 million dollars as a result.

Reasons for sluggish exports to Japan by major items are as follows.

Table 3-1 Reasons for Exports Decline to Japan by Sector

2013-17 Sectors Pak exp to Jap Japan Imp from World Survey results (USD mns) (USD mns) High tariffs 65.8 5,257.40 Textiles Visa issues Articles of Apparel 38.1 High tariffs 31,702.60 Visa issues Base Metals 20.2 31,520.30 Visa problems High tariffs 15.6 6,063.40 Leather Certification issue Visa Problems 12.5 210,039.80 Mineral Products Constant demand Visa issues Support needed in upgrading 10.8 20,425.40 skills to meet enhanced Vegetable Products Japanese Standards Support needed in reaching 8.0 15,968.90 Animal Prods(Fish, meat, Dairy) Standards Visa issues Support needed in upgrading 7.7 28,105.40 their skills to meet enhanced Surgical Instruments Japanese Standards Mis. Manufactured Articles 5.8 15,239.00 Standards compliance Prepared Foodstuffs 2.1 23,670.70 Standards Compliance Source: Presentation Material of Ministry of Commerce, Pakistan

All the items are only a very small proportion compared with the total imported amount in Japan. It is explained that the main reasons for major stagnation are high tariffs, visa problems, certificate problems, necessity of technological enhancement to meet Japanese standards, difficulty of compliance with standards, and so on.

On the other hand, breakdown of imports to Japan and comparison with other countries are as follows:

Table 3-2 Major items Imported from Japan (2017) and tariffs as well as comparison with other countries

Important sectors for Japan USD millions Pak imps %age from share of Imports Imports MFN rate Japan avg Pak imps Japanese China FTA from Maly FTA from Sectors (avg) 13-17 average imports rate China rate Malaysia Vehicles 34.3 887.26 2,254.50 39.40% MFN 399.69 MFN 50.6 Machinery 9.8 322.74 4,347.30 7.40% 2.2 1,206.07 2.8 60.7 Iron and steel, Articles of iron and steel 13.9 239.67 3,101.90 7.70% 8.8 944.78 8.2 12.1 Misc manufactured articles 15.5 213.61 1,992.00 10.70% 7.5 259.3 7.6 8.8 Electrical equipment 15.3 60.6 3,784.70 1.60% 5.9 2,149.73 6.3 25.2 Chemicals 11.7 60.43 5,268.50 1.10% 3.1 1,379.18 3.5 90.2 Medical or surgical instruments, 9.1 46.84 559.9 8.40% 2.2 126.57 2.1 6.2 Textiles 13.7 33.86 2,744.10 1.20% 9.2 1,058.95 5.3 44.5 Plastics, Articles of plastic 15.4 32.9 1,995.70 1.60% 5.2 303.24 13.3 34.3 Source: Presentation Material of Ministry of Commerce, Pakistan

Note: MFN：Most Favorable Nation Treatment

In Table 3-2, it explains about the ratio of major import items from Japan to the total import value of Pakistan as well as comparison with China and Malaysia respectively, showing the tariff rate, of which China and Malaysia concluded FTA with Pakistan. It suggests that Japan faces the problem of tariff rate differences in machinery, electrical equipment, steel, chemicals, medical and surgical equipment, textiles and plastics.

3-2 Investment Promotion Regarding Foreign Direct Investment (FDI) to Pakistan, they shown the total FDI, the comparison ,and trend of FDI from Japan as follows.

7.1％ 1.5％ 2.1％ 1.9％

Figure 3-1 Trends of Foreign Direct Investment for Pakistan Source: Presentation Material of Ministry of Commerce, Pakistan

Overall, the amount of FDI from Japan is extremely small. In the total FDI to Pakistan, share of Japan's FDI since 2014 peaked at 7.1% in 2015 and decreased to 1.9% in 2018. The breakdown of FDI from Japan is shown as follows.

Figure 3-2 Breakdown of Foreign Direct Investment from Japan to Pakistan Source: Presentation Material of Ministry of Commerce, Pakistan

The total FDI from Japan declined by 16% from 2015 due to the decrease of power, trade and chemicals, and slight increase is seen in the financial and automotive sectors. It is pointed out that the overall trend is on downward and investment in the automotive sector has not increased so much.

Pakistan is expecting a decrease in automobile-related imports from Japan and exports from Pakistan in the future as a result of further investment reinforcement from Japan in the automobile sector.

In order to attract overseas enterprises, Pakistan has established SEZ and provided the following incentives. They would like Japanese enterprises to enter SEZ and to increase their investment in Pakistan more. ➢ Tax exemption for 10- year income of tenant enterprises ➢ Exemption of import duties on capital goods constructed and installed in SEZ ➢ Supply of gas, electricity, water etc. ➢ Function as a one-stop shop for contact / facilitation by BOI ➢ Additional incentives granted to the following 9 higher priority SEZs under CPEC include provision of site on installment payment basis (50% down payment and quarterly payment), low markup rate loan, cargo subsidy (50% in inland transportation of plants and machinery), etc. (Refer to Table 2-4 for SEZ according to CPEC framework.)

However, various problems are being pointed out from Japanese companies currently having factory at SEZ in Bin Qasim area, and under the present circumstances, the situations explained by Pakistan are not necessarily in place. (Refer to Chapter 4 and Chapter 5)

Chapter4 Business Environment in Pakistan from the Viewpoint of Japanese Companies 4-1 Survey Method The survey in this Chapter refers to the document information by JETRO, JICA, and the Karachi Japanese Commerce and Industry regarding the business environment of Pakistan as well as the requests of Japanese companies made. In addition, a questionnaire survey on this subject was conducted to Japanese companies related to Pakistan. Through their answers of their views and ideas on the business environment or the issues they faced, it is decided to consolidate direct comments of the Japanese companies in the present situation as much as possible for analysis.

The main items of the questionnaire survey are as follows: ➢ Attractiveness and competitive advantage of Pakistan ➢ Promising industries for investment in Pakistan, ➢ Investment decisive factors and impediment factors ➢ Trade opportunities with Pakistan ➢ Identification of recognition gap on business environment and factor analysis

The main evaluation methods in the questionnaire survey items are as follows: ➢ Evaluation by Perception (Subjective) (Evaluation point of 1 to 5) ➢ Objective evaluation based on actual situation (import and export etc.) ➢ Complementing information by description format

The questionnaires Survey was conducted in August 2018, and total of 50 Japanese companies responded to us. The main breakdown of the responding companies is as follows. By Operating /Non-operating in Pakistan By Industry Type

Figure4-1 Breakdown of Companies responding to Questionnaire Survey

In addition to the questionnaire survey, we conducted a direct interview with Japanese companies which responded to the survey and those operating in Pakistan in order to obtain in-depth

25 information. Based on the information, we conducted the following analysis on the business environment of Pakistan from the viewpoint of Japanese companies.

4-2 Survey Analysis 4-2-1 Analysis of Attractiveness and Competitive Advantage Regarding the attractiveness and competitive advantage of Pakistan, the following consideration and analysis were carried out based on the information obtained from the questionnaire survey.

1) Attractiveness of Pakistan In the questionnaire survey, we asked responding companies about Pakistan’s attractiveness on items of market, integration of industries, labor force, infrastructure, procedure & institution, politics & society by 1 to 5 grades (1: lowest ~ 5: highest). The result was as follows.

（１：The lowest～５：The highest, Numbers of each item are average values after aggregation ） Figure 4-2 Aggregate Results on Pakistan's Attractiveness

Based on the results above, the top five items as the Pakistan’s attractiveness are as follows: Top5 Evaluation Point 1. Economic Growth 3.62 2. Pro-Japanese Sentiment 3.50 3. Market Size 3.42 4. Low Labor Cost 3.40 5. Retention Rate of Labor 3.05

On the other hand, the worst 5 items in terms of non-attractiveness are as follows: Worst5 Evaluation Point 1. Security 1.86 2. Living Environment 1.95 3. Political Stability 1.98 4. Power, Water, Transport, Communication 2.073 5. Taxation System 2.071

Highly evaluated items are "Economic Growth Potential", "Market Size", "Low Labor Cost", "Pro- Japanese Sentiment", and it shows that it is attractive about stable growth in recent years and large population of 200 million as a potential market. On the contrary, low evaluated items are "Security", "Living Environment", and "Political Stability". These issues have lowered the image for Pakistan. Excluding political and social aspects, the worst 5 consists of 1) "Enhancement of Electricity, Water, Transportation and Communication", 2) "Tax System", 3) "Quickness of Procedures", 4) "Ease of Local Procurement", and 5)"Supporting Industry". As a result, issues of infrastructure inadequacy, administrative inefficiency, and immature supporting industry can be seen.

2) Advantages of Pakistan Regarding the competitive advantage, we asked responding companies to make multiple answers that seem to be applicable for the following items in the questionnaire survey. ➢ Market size & Economic growth potential ➢ Business expansion due to economic growth ➢ Ease of establishing business ➢ Cost advantage over other countries ➢ Advantages of procurement by enrichment of supporting industries

➢ Development of logistics and infrastructure ➢ Easy to secure talented human resources

The results are as follows:

(Total of multiple answers by 50 Japanese companies.) Figure 4-3 Aggregate Results on Pakistan's Advantages

The top three items of Pakistan's advantages are as follows: Top3 Number of Companies 1. Market size & Economic growth potential 30 2. Business expansion due to economic growth 22 3. Cost advantage over other countries 16

The largest number of Japanese companies (61% of the total) considered "Market Size & Economic Growth Potential" as the largest advantage and attractiveness as well. In addition, "Expectation for Business Expansion" accounts for 45% of the total, and "Cost Advantage" accounts for 33% of the total. There is a tendency to view that Pakistan market is a promising and that low-cost labor is its strength. Compared with the other items, the number of respondents is overwhelmingly larger in these three items, and conversely, with respect to the other items, there is almost no answer of "Securing Excellent Human Resources" and "Ease of Establishing Business". These are not regarded as superiority in the situation. There is no response to “Supporting Industry” and "Infrastructure ".

4-2-2 Analysis of Promising Industries, Investment Decisive Factors, and impediment Factors

Focusing on several sectors such as the automotive industry as the major investment sector of Japanese companies, consumer goods sector as expected to grow in the future, and main industries in GDP of the country, analysis of promising industry and investment decision factors was done. Based on the results of the questionnaire survey and interviews, selection of promising industries and analysis of investment decisive factors and impediment factors were made as follows;

１） Promising Industries of Pakistan Based on the questionnaire survey, the top 10 promising industries for investment in Pakistan are as follows: TOP10 1. Automotive 2. Auto-parts 3. Daily Necessities 4. Processed Foods 5. Materials New promising sectors 6. Pharmaceutical 7. Logistics 8. Retail 9. IT Related 10. E Commerce

Figure 4-4 Aggregate Results on Pakistan's promising industries

The automotive industry is selected as the most promising, and responses of "automotive" and "auto-parts" account for 38% and 32% of the total respectively. Next to the automotive industry, "daily necessities" (28% of the total answers) was selected and it may be related to the population size of 200 million in Pakistan and the proportion of young people (60% of the population under 30 years old). Following that, responses to "processed foods", "materials", "pharmaceuticals" and "logistics" accounted for about 20% of the total are highlighted as future investment promising fields. In addition, there are opinions that the IT industry and e-commerce seem promising also in the future.

2) SWOT Analysis of Pakistan Industries Through the questionnaire surveys and corporate interviews, SWOT analysis on the entire Pakistan industry is made after collecting and aggregating information on the strengths, weaknesses, opportunity, and threat related to the Pakistan industry. The result is as shown below:

Table 4-1 SWOT analysis of Pakistan industry as a Whole

・Low wage

・Price competitiveness

・Abundance of human resources

・Highly growth of domestic market supported by robust purchasing demand

・Expectation of future demand Strength ・Vigorous consumer demand. Expansion of middle class ・They have a system that can produce cotton textile products cheaply by vertical integrated production from cotton. ・High market share of Japanese cars

・The volume of tanning to leather is top class in the world

・Few competitors in Pakistan

・Security Issues

・Geographical distance with Japan, import cost and transport time ・No tariff preferential treatment with Japan. Compared with India, Bangladesh, Southeast Asia, it is disadvantageous in terms of tariffs. ・Poor infrastructure ・The level of business correspondence is low (small lot correspondence cannot be done. Quality is unstable, no stable supply etc.) Weakness ・Poor understanding of the quality level required in the Japanese market. ・Difficulty of communication with Japanese to be hindered by distances, language and cultural barriers ・It is difficult to raise the current procurement ratio due to low skills of component manufacturers. ・Cost structure affected by foreign exchange due to import of most of raw materials

・The environmental regulation is remarkably delayed compared with that of other countries.

・The variety of the product is narrow and it cannot be diversified into other items.

・Future growth market with a population of 200 million

・Market growth can be expected with economic growth and population increase. ・expectation for shifting value-added advanced market by increase of population, stabilized public security. and increase of income ・Expand business by exemption of tariffs

Opportunity ・Less advancement of other competitors in the same industry

・The number of births is large compared with Japan.

・Expanding business to new automotive manufacturers by new automotive policy ・Business opportunities on Metals, Transportation machines, Machines, Infrastructure, Plants, Resources, Chemicals, Foods, Agriculture, Lifestyle related industries, and Energy and Urban development

・It is expected not only Pakistan but also lateral expansion to the Islamic cultural area.

・Political instability

・Unstable foreign exchange fluctuation

・The presence of competitors with price advantage in neighboring countries ・Rising interest and labor costs, restriction of dollar remittance due to declining foreign reserve ・Lack of growth strategies as a country Threat ・Unstable government management of domestic economy

・Unstable taxation system ・Weakness such as inconsistent policies and vulnerable circumstances would become extremely obvious and lead to country risk. ・Competition intensified in the future as competitors enter the market ・Production and sales may be sluggish due to unstable economic & political trends and geopolitical risk.

3) Investment Decisive Factors & Impediment Factors The top 5 topics on the investment decisive factors based on the questionnaire survey are as follows （1：The lowest～5：The highest. Showing the average value of each item） 1. Market Size & Growth Potential 3.9 2. Wage level 3.2 3. Foreign Exchange Regulation 2.8 4. Trade Clearance System 2.5 5. Procedure for Investment 2.5

Conversely, the worst 5 of impediment factors is as follows 1. Security 1.6 2. Political Stability 1.9 3. Infrastructure 2.0 4. Taxation System 2.1 5. Political Consistency 2.3 Figure4-5 Aggregate Result of Investment Decisive Factors

The evaluations of the top investment decision factors are as follows: 1. "Market Size & Growth Potential" 3.9 points ⇒ This is the biggest factor that the market scale is large and economic growth has been achieved.

2. "Wage Level" 3.2 points ⇒ Low wages as well as economic growth is important factor for investment decisions. 3. "Foreign Currency Regulation" 2.9 points ⇒ Foreign currency regulation is evaluated as moderate compared with other countries.

Worst of the biggest obstacle to investment decision is 1) 1.6 points of "Security”, and the next is 2) 1.9 point of “Political Stability”.

4-2-3 Analysis of Trade Opportunities １） Bilateral Trade between Pakistan and Japan Improvement of trade balance is an urgent issue in Pakistan. For this purpose, it must be urgent to strengthen exports of textile products that account for more than 50%, to expand new export markets, and to develop new export items. Exports to Japan have been on the declining trend also in recent years and trade deficit has continued to expand with the expansion of imports to Japan.

Import from Japan Export to Japan Trade Balance

Figure4-6 Trend of Pakistan’s Trade with Japan and Trade Balance Source：ITC

２）Pakistan’s Export to Japan The breakdown of Pakistan’s export by item is as follows:

Table4-2 Breakdown of Export to Japan by item 2017 (Unit: USD million)

Product Value %

Total 217 100 Textile & Textile Articles 107 50 - Cotton yarn and woven fabrics 60 28 - Articles of apparel and accessories, not 18 8 knitted or crocheted 1 - Articles of apparel and accessories, knitted 17 8 or crocheted - Made-up textile articles 9 4 - Others 3 1 Metals 42 19 - Articles of Iron or steel 29 13 2 - Copper 12 6 - Others 1 0 Mineral Products 16 7 - Mineral fuels, mineral oils and products of 3 8 3 their distillation - Articles of Iron or Steel 4 2 - Others 4 2 Leather 14 6 4 - Articles of leather 9 4 - Fur skins and artificial fur 5 2 Animal Products 12 5 5 - Fish and crustaceans, etc. 9 4 - Others 3 1 Others 26 13 Source: ITC TRADE MAP i) Textile Products Pakistan has five major items for export such as textile products, agricultural products & processed foods, leather products, surgical instruments and sports goods. Textile products account for 50% of the total export to Japan, and become the largest export item. However, more than half of total textile export to Japan is occupied by low-value-added products in such as cotton yarn and cotton fabrics, and it tends to be affected by commodity market situation. Therefore, the export price is decreasing as the market price decreases. There is a need to raise the proportion of high value-added apparel and home textile products. However, it is difficult to enter the Japanese market unless these products would have a further competitive advantage and differentiation in the competition with China, Bangladesh, Vietnam and so on. In Pakistan, there are opinions that tariff reduction on their export products shall be required due to price disadvantage compared with other Asian competitors such as Southeast Asian countries and India. On the other hand, as the current currency depreciation rate has already been far exceeding the import

33 duty rate, the price competitiveness issue is being relaxed. It is worth noting how much export growth can be increased under this situation. On the other hand, there are opinions of Japanese textile importers as follows. ➢ Even if import duties would be at the same level as India, Bangladesh, and Vietnam, it will not motivate us to start importing from Pakistan unless they could clearly take advantage in price, quality and delivery. ➢ It is too much biased to cotton products, and it is difficult to fill in containers unless more variety of synthetic fiber products. It seems to be necessary to strengthen the industrial structure that can respond to the needs of such Japanese buyers. ii) Agricultural & Marine Products and Processed Foods Regarding agricultural & marine products and processed foods, it accounts for about 12% of exports to Japan, among which export of seafoods is the most exported, which accounts for 4.1% of total exports to Japan. Regarding processed foods, some Japanese companies have the following comments with expectation for the future growth. ➢ Prospective export items to replace textile are processed foods and seafoods. Pakistan has not fully utilized the rich agricultural and marine resources as export products yet. There is a possibility that this sector will grow greatly by supporting logistics such as cold chain and processing technology in the future. ➢ Abundant marine products are likely to be exported more if there is processing technology / facilities. Fruits, vegetables, and rice can also be exported with more devising ways. According to business people in Pakistan, it is said that about 40% of agricultural products are being disposed in Pakistan, as well as the fact that logistics has not been sufficiently developed yet. Since marine products such as seafood and shellfish are not used much for edible, there are plentiful marine resources, and the future growth can be expected as export products as logistics and processing technology would be improved.

Other than the above items, there were also many comments by Japanese companies evaluating the quality of leather goods, and sports goods are also expected to strengthen exports for the next 2020 Tokyo Olympic Games. In addition, Pakistani intends to strengthen IT industry as emerging export industry for the future, and they would like to seek support from Japan and to promote strengthening business exchanges in IT sector.

3) Pakistan’s Import from Japan (or Japan’s Export to Pakistan)

The value of imports from Japan in 2017 (export value from Japan) was 2,294 million dollars, which is more than 10 times the export value to Japan (217 million dollars), and the trade deficit continues steadily. The breakdown of major items imported from Japan are as follows:

Table4-3 Breakdown of Import from Japan by item 2017 (Unit: USD million)

Product Value %

TOTAL 2,294 100

Transport Equipment 1,208 53 1 - Vehicles, and parts and accessories 1,206 53 - Others 2 0 2 Machinery 426 19 - Machinery, appliances 361 16

- Electrical machinery and equipment 65 13

3 Iron and Steel 346 15 - Iron and Steel 281 12

- Articles of Iron or Steel 48 2

- Copper and Articles thereof 6 0

- Others 11 1

4 Optic, Photographic Instruments, etc 94 4 - Medical Instruments 94 4

Chemical Products 61 3 - Organic Chemicals 25 1 5 - Tanning or dyeing extracts 9 0.4 - Others 27 1.3 Others 159 7 Source: ITC Map i) Transport equipment As for the breakdown of imports, transportation equipment accounts for 53%, of which breakdown consists of vehicle (66%), truck (15%), and tractor (8%). The following to the transportation equipment is machines which accounts for 19% of the total, mainly consisting of bulldozers and shovels (16%), engines (9%), spinning fiber preparation machinery (9%), looms (6%), and Centrifuge (4%). Regarding the transportation equipment, it seems that the import of used cars is a major part of it, and the import of auto-parts is also a major factor in the country's import from Japan. In this sense, there are opinions from Japanese companies that it is necessary to have stricter import restriction of used car imports and to raise the local procurement rate of auto-parts to develop automotive industry, which will be a measure to contribute to import reduction of Pakistan. ii) Domestic Consumer Market

On the other hand, domestic consumer market is expected for future growth by many Japanese companies, and there are opinions on exports of consumer goods to Pakistan as follows: ➢ Pakistan has a superiority in the population (200 million), pyramid type of the population composition, and geopolitically important position. ➢ Market is expanding and the market potential is high. ➢ The population growth rate is as high as 2% / year, which is promising for consumption-related industries. ➢ Based on expanding market size, growth in automobile, processed food, daily necessities, medicine and other items would be expected. Consumer goods such as instant noodles, powdered drinks, diapers, and sanitary supplies are promising. Meanwhile, as for the import of consumer goods such as foods, if a high rate of regulatory duty would be imposed even in the initial marketing stage, it will not lead to future local production. It is necessary to improve the administrative treatment of the government for such issues.

Other than the above, there are opinions that IT sector and E-commerce are expected for trade increase. ➢ There is a possibility of subcontracting from developed countries because of availability of low- cost IT engineers and English ability. ➢ Japanese brand e-commerce is promising because of luxury goods oriented.

4-2-4 Identification of Recognition Gap on Business Environment and Factor Analysis

１）Reason of Entering to Pakistan The main reasons of entering Pakistan obtained from the questionnaire survey are as follows: ➢ Market size and market growth ➢ Entering Pakistan for textile business ➢ Potential of other business development such as economic cooperation projects ➢ Pro-Japanese sentiment and sincerity in business ➢ Merit of no competitors in the country ➢ Possibility of handling operation from India ➢ High market share of Japanese cars ➢ Acquisition of incentives for new entry and special economic zone. "

２）Reason of not Entering to Pakistan On the other hand, the reasons for non-entering are as follows: ➢ Critical security and safety circumstances (Safety management ) ➢ It is not in an environment where customers or other companies can enter

➢ In case of producing locally, there is a problem in infrastructure, procurement, and rent. ➢ Safety and health issues for living and issues of political stability. ➢ Prioritize India in South Asia due to market size and political confrontation. ➢ Having no know-how for local operation in Pakistan. ➢ No necessity to enter at present ➢ Insufficient market research ➢ High recovery risk to invest

３）Investment Decisive Factors and Impediment Factors Comparison of investment decisive factors and impediment factors between entering and non- entering companies based on the results of the questionnaire survey is as follows: Entering Companies Non-Entering Companies

Figure4-7 Aggregate result of investment Decisive Factors (entering and non-enterprising companies)

The top three of investment decisive factors of both entering and non-entering companies are common and as follows: 1. Market Size and Potential Growth 2. Wage Level 3. Foreign Currency Regulation Evaluation on market size and growth potential by entering companies are higher than one by non- entering companies.

On the other hand, with respect to the worst there (impediment factors) of entering companies and non-entering companies are as follows respectively: 1. Security 1. Security

2. Infrastructure Development 2. Political Stability 3. Taxation System 3. Infrastructure Development “Security” is common as the worst 1, however, the second and third ranking of entering companies are “Infrastructure Development” and “Taxation System” respectively, and it shows the seriousness of these problems in Pakistan.

4) Necessary Items to Promote the Entry into Pakistan The main suggestions obtained from both the entering companies and the non-entering companies for necessary items to promote the entry into Pakistan are as follows: ➢ Improvement in security situation (It is necessary to dispel prejudice due to recovery of public security in recent years) ➢ Improvement in infrastructure ➢ Clarification and stabilization of policies ➢ Improvement in taxation system (Simplification of tax return work, simplification of withholding tax exemption procedure, etc.) ➢ Simplification of procedures for applying for work visas (simplification of examination and procedures) ➢ Improvement in foreign remittance procedures (Speed up permission for remittance of trade payment, dividend, loyalty, etc.) ➢ Stability of foreign exchange ➢ The existence of an excellent agent that mediates the business between Pakistan and Japan ➢ Changes in the economic environment where can create the demand for high-quality products.

4-3 Comparative Examples on Business Environment in Pakistan 4-3-1 Ranking in “Ease of Doing Business 2019” by the World Bank The World Bank publishes the business environment ranking by "Ease of Doing Business Index" every year. "Ease of Doing Business Index" is a comparison of the institutional environment in business activities of about 190 countries and ranking the ease of business of each country. In various indices of 10 items, They score the difference from the top of each country with the top country as 100%. The total score is evaluated by simply averaging the total score of various indices.

Trends of the ranking for Pakistan over the past 5 years are as follows.

Table4-4 Ranking of Pakistan in “Ease of Doing Business”

Esae of Protecting Trading Doing Starting a Dealing with Getting Resistering Getting Enforcing Resolving Year Minority Paying Tax Across Busines Business Construction Electricity Property Credit Contract Insolvency Invester Boarders Rank 2014/15 128 116 125 146 114 131 21 172 108 161 78

2015/16 138 122 61 157 137 133 25 171 169 151 94 2016/17 144 141 150 170 169 82 27 156 172 157 85 2017/18 147 142 141 167 170 105 20 172 171 156 82

2018/19 136 130 166 167 161 112 26 173 142 156 53 (Source: World Bank) In the past five years, Pakistan was downgrading year by year, but it stopped falling at 147th of the previous year and ranked at 136th in 2019. However, it is still sluggish at a low level, and compared with the other South Asian countries, India is ranked at 77th in 2019, meanwhile, Bangladesh is 176th. Out of the top ten countries that had the most improvement through reform in 2019, two countries of India and Afghanistan were ranked from South Asia for the first time, and India implemented six reforms in the past year. India’s rank of 77th is highest in the region.

The worst 3 of the ranking among the 10 items in 2019 are as follows: ➢ Paying Tax 173th ➢ Getting Electricity 167th ➢ Dealing Construction 166th

Regarding “Paying Tax” that became the worst 1, there are many comments that the taxation system is a hindrance factor for investment even in Japanese company questionnaires. In that sense, the improvement on the taxation system is a common challenge and Pakistan should address urgently. There are also many comments that pointed out on “Getting Electricity” of the worst 2 from Japanese companies as requesting improvement of infrastructure development, which is also a commonly recognized issue.

Items with improved ranking compared with 2018 are as follows: ➢ Starting a Business 142th -> 130th ➢ Registering Property 170th -> 161th ➢ Trading Across Borders 171 -> 142th ➢ Resolving Insolvency 82th -> 53rd

It is worth noting that the ranking of “Trading Across Borders” has been largely improved among them. In the overall process of importing and exporting, there was improvement in the time and cost (excluding tariffs) related to document compliance and domestic transport procedures. In order to

39 expand import and export in the future it is expected that such improvement would contribute to further trade expansion.

4-3-2 Ranking in Global Competitive Index 2018 by World Economic Forum Countries are ranked according to the Global Competitiveness Index in the Global Competitiveness Report (UK: Global Competitiveness Report, abbreviated GCR) published by the World Economic Forum. The World Competitiveness Index is defined as measuring the combination of institutions, politics, and factors that define current and medium-term levels of sustainable economic prosperity, based on the 12 pillars of competitiveness shown in the chart below, and the ranking is decided. The ranking of Pakistan in 2018 is 107th, which is almost the same as Bangladesh of 103th in the South Asian region, however, it is greatly separated from India of 58th.

GCI2018 Point comparison

100 80 60

40 20 0

Pakistan Bangladesh India

Macro Infrastractur Product Labor Financial Business Innovation Country Overall Institutions ICT adation Economic Health Skills Market Size e Market Market System Dynamism Capacity Stability Pakistan 51 46 59 24 70 58 40 48 50 54 71 59 35 Bangladesh 52 46 53 40 73 71 44 48 51 52 67 50 31 India 62 58 69 28 90 59 54 51 58 70 93 61 54 (Source:World Economic Forum) GCI2018 Point comparison Figure4-8 Ranking of Major South Asia Countries in Global Competitiveness Index 2018 (Unit: Ranking) Source：World Economic Forum

Among the comparison with India, the market size is far apart, followed by a large difference in social institutions, infrastructure, macroeconomic stability, labor market, financial system and other fields. In comparison with Bangladesh, Pakistan is superior to Bangladesh in terms of business dynamism and innovation ability, although it has no big difference overall. On the other hand, Bangladesh's ranking is higher in terms of macroeconomic stability and ICT adaptation.

The breakdown of index points in the 12 pillars of competitiveness in Pakistan is as follows:

Pakistan GCI2018 Index Point

80 70 60 50 40 30 20 10 0

（Unit: Index Point, 0：the lowest―100：the highest）

Regarding Pakistan, there are two items as relatively high evaluation items of 70 points or more, such as the market size (71) and macroeconomic stability (70). On the other hand, ICT adaptation (24) and innovation ability (35) are two items with low evaluation. Regarding market size, many Japanese companies highly evaluate the attractiveness and superiority of Pakistan, and they are highly valued in common. Meanwhile, the stability of the macroeconomy was not recognized particularly by Japanese companies, and it was evaluated in aspect of economic growth. Although ICT and innovation are expected to grow in the future, it is shown that it may take time in terms of competitiveness.

Chapter 5 Measures for Strengthening Bilateral Economic Relationship

5-1 Improvement of Investment Environment 5-1-1 Overview of Investment Environment Suppression of the current account deficit and improvement of the trade balance are urgent issues in Pakistan, and improvement of the trade balance requires high value-added products of existing industries that account for textiles and food processing as majority of export as well as development of new industry. Further, in order to maintain sustainable economic growth in the future, it is necessary to break away from the current economic structure that depends on exports of textile products, to realize diversification of industries through promotion of foreign investment, and to enhance industries with export competitiveness. Investment from Japan has still remained at a very low level due to concerns about security issues. In recent years, however, there are also companies entering the domestic market such as Yamaha, Ajinomoto, Morinaga, and there are slightly increasing trends in the number of companies entering the market. Although the country's ranking in the World Bank's "Ease of Doing Business" was improved to be 136th in 2019 from 147th in the previous year, the nine items out of the 10 indicators excluding “Getting Credit” were flat or lower. Further reforms shall be required in order to improve the business environment. In general, although the Pakistan government has declared to attract foreign investment strongly, the motivation for foreign companies to invest in the country seems still weak. In the 2010’s, China has emerged as a major investment country, but the size of foreign investment is small compared to the economic scale and future potential, and for direct investment by Japanese companies, it is limited to some large sized companies such as automotive manufacturers. To promote FDI to Pakistan, it is essential to solve problems in the investment environment such as security problems, issues of power shortage, tax payment procedure simplification, etc. However, there is also a problem in the method of attracting investment. For example, there is little information on Pakistan, and one-stop services like ASEAN countries cannot be provided. Although there is a BOI, it is FBR that has jurisdiction over the investment tax incentive system, and the company establishment is vertically divided with Pakistan Securities and Exchange Commission (SECP) and BOI. In addition, although various investment incentive schemes are prepared, it is hard to understand them, and operation is also unclear. Therefore, sufficient information through publicity has not been provided. It is necessary to increase FDI and improve the business environment for foreign companies including Japanese companies by promoting improvement of the investment environment of the country.

5-1-2 Extraction of Issues We extracted comments on issues related to investment environment of Pakistan obtained through the questionnaire survey and corporate interview. They are summarized as 3 items of the main issues such as 1) investment climate arrangement, 2) automotive industry, and 3) domestic consumer market as shown below:

1）Investment Climate Arrangement A. Security Issues Major Issues Comments from Japanese Companies ・Security concerns and vulnerability of the financial base are weak

points. It will be the same figure after 20 years if there would be no development of infrastructure that allows foreign companies to enter

Security Concern more. ・It is an impediment to the implementation of business trip due to security issues and the Ministry of Foreign Affairs' travel restricted areas. ・While concerns about security have not been wiped out and there is

Wiping prejudice on Security Concern is an idea that safety assurance is a problem, security has been greatly Needed improved in the last few years, and there are views that it is necessary to dispel the prejudice of "danger / dangerous country"

B. Administrative Issues Major Issues Comments from Japanese Companies · Import duties may suddenly rise and it is a big obstacle to business. The tax system should be stabilized. · There is a problem of refund unpaid. Unstable and Unfair Taxation System · Customs duties are disadvantageous to existing automotive industry. · It is necessary to revise high-rate tariffs that hinder import sales for advancement of foreign companies into Pakistan.

・There is a problem on delay of remittance procedures such as royalties to Japan at the Central Bank of Pakistan.

· Since all raw materials are not covered by their own country, it is Overseas Remittance Issues inevitable to bring in materials from overseas, but business cannot grow unless free settlement and remittance are possible · Elimination of uncertainty related to overseas remittance is necessary. (Acceleration of remittance permission review, deregulation, simplification of withholding tax reduction exemption procedure based on tax treaty)

Unstable Exchange Rate · It is necessary to stabilize foreign exchange.

· It is necessary to simplify the taxation system (simplify tax reporting Simplify Taxation work). ·. Simplify Visa acquisition Procedure · Elimination of corruption is necessary. Elimination of Corruption · Elimination of corruption is necessary. Unstable SEZ Procedures · Procedure with SEZ are inconsistent and different from regulation · Establishment of a solid administrative system (especially food Unstable Law Maintenance related). Legal development concerning food is often unclear and uncertain in many cases. Request for Improvement of Business · It is necessary to request for improvement of the business Environment to the Government environment without interruption. · Although BOI says that they are making improvements through one- Recognition Gap between Government and stop service, SEZ operation, procedure online, website revision, etc., Private Sector we cannot recognize such improvement and there is no difference in recognition.

２）Automotive Industry A. Issues on Auto-parts Manufacturers Major Issues Comments from Japanese Companies ・Many new car manufacturers were attracted by ADP, but in Need of Overseas Manufacturers and to order to develop the automotive industry from the ground up, it is Develop Local Companies essential to nurture local parts manufacturers by advancing overseas parts manufacturers. · Twenty Korean auto-parts manufacturers will come to discuss Request for Japanese Auto-parts and talk with local companies, while Japanese auto-parts manufacturers' Advancement companies are still cautious for entering Pakistan , there are voices of local irritation.

· It is difficult to raise the current local contents ratio because the Increase of Local Contents Rate basic skills of local manufacturer is low.

Issues of Auto-parts quality · Low quality of local parts manufacturers

Lack of Willingness to Introduce New · Low motivation to introduce new technology. Technology

B. Administrative Issues Major Issues Comments from Japanese Companies Fair Treatment on institutional aspects is ・It is doubtful if fair treatment on institutional aspect is provided to Needed related to ADP Japanese auto companies doing business in Pakistan. ・The environmental regulation is remarkably delayed compared Issues of Environmental Regulation with that of other countries, and as a result there is a limit to overseas export development ・It is necessary to regulate imported vehicles. There is a Strict Implementation of Used Car Import regulation of used cars, but I want them to be strictly applied (it will Regulation is Required be a factor that hinders development of existing auto industry). ・A considerably high tariff is imposed on items which can be High Rate of Import Duty for Auto-parts produced in Pakistan. Requests to lower the tax rate on import duties.

・Customs duties are disadvantageous to existing automotive Tariffs Unfavorable to Existing Companies companies.

３）Domestic Consumer Market Major Issues Comments from Japanese Companies We should pay attention to the fact that growth in automotive, Responding to Expanding Market processed food, daily necessities, medicine can be expected in the expanding market. · We should recognize the possibility of logistics hub connecting Possibility of Logistics Hub Asia / Eurasia / Europe. ・It is necessary to revise high-rate tariffs that hinder import sales High Rate Tariff that Hinders Import Sales for advancement of foreign companies into Pakistan. · Establishment of a solid administrative system (especially food Unclear Law Maintenance in Food Sector related) is needed. (Legal development concerning food, response to Halal, high tariff etc.)

5-1-3 Identification of Items to be Improved and Suggestions for Improvement Based on the information of issues related to the business environment in Pakistan considered by Japanese companies pointed out in 5-1-2, five main items are identified as improvement targets in the aspect of investment climate improvement. The main items are 1) Taxation System, 2) Overseas Remittance Issue, 3) Special Economic Zone (SEZ) Issue, 4) Security Concern, and 5) Strengthening Automotive and Auto-parts Industry. The details are as follows:

1) Taxation System ＜Items to be Improved＞ Many Japanese companies pointed out problems on unstable taxation and procedures as well as necessity to simplify tax procedures related to import taxes, refunds, tax return procedures. The problem of the tax system is that Pakistan's tax payment ranking of 173rd in the World Bank's "Ease of Doing Business" and is recognized as a big issue as an impediment to investment. Regarding import duties, regulatory duty is imposed on the importation of specific goods separately from normal import duties. The tax rate often rises suddenly, and It can be a problem for business people to continue the business. In case of a Japanese companies, they complained that the regulatory duty was initially imposed 10% apart from the import duties (20%) on the product imports but jumped up to 50% in 3 years. Abolition of regulatory duty is important for improving the future business environment. There are also many stories that tax refunds have been left unpaid. In several Japanese companies that have obtained corporate tax exemption, Final Tax Regime (FTR) were applied to them and they had to pay withholding tax on the total sales amount and importing raw material. There are cases in which withholding taxes have been withheld are not refundable for several years.

Moreover, there are opinions that in the current Automotive Development Policy (ADP), tax incentive measures for existing automotive industry are unfair compared with new entrants, or also opinions that high tariffs on imported products will result in hindering future advancement at the marketing stage assuming local expansion. Furthermore, some companies pointe out as a hindrance to the minimum tax imposed a tax amount of 1.26% on sales even if the company has loss. Together, it is necessary to simplify withholding tax exemption procedures and tax return procedures based on the tax treaty. It is necessary to simplify these issues, which is also in line with the issues on taxation items of the World Bank.

＜Suggestions for Improvement＞ ◼ Requesting Government to Improve Regulatory Duty and Tax Refund Issue Regarding the regulatory duty, the government intends to review it, and it is desirable to continuously check the progress on a regular basis. Likewise, it is desirable to request the government to handle the refund payment issues for improvement and to confirm the progress.

2) Overseas Remittance Issue ＜Items to be Improved＞ Many problems are pointed out about unstable foreign currency regulations and delays & uncertainties in foreign currency remittance procedures. Unless business people can have free settlement or remittance, it will lead to impede business and economic growth. Regarding remittance for import payment, prepaid remittance before shipping had been permitted up to US $ 10,000, but regulations on import settlement methods were strengthened by Circular No.06 & 07 of 2018 in July 2018, and prepayment remittance became impossible in principle. As a result, the business with low creditworthy counterparts is in a difficult situation. While all foreign currency remittance procedures such as dividends, royalties, technical assistance fees, etc. shall be reviewed by the central bank, it is pointed out that the central bank's review will be delayed for a long period, and it causes the payment delay to the headquarters and service providers. There are many business disadvantages caused by such problems. Elimination of uncertainty related to overseas remittances, speeding up of remittance permission review, deregulation, etc. are required. These problems seem to be caused by measures taken to prevent foreign currency outflows in line with the recent decline in foreign exchange reserves, but if such a foreign currency regulation or remittance delay problem would not be resolved promptly, a vicious cycle of further economic deterioration would happen.

＜Suggestions for Improvement＞ ◼ Requests for Improvement to the Government and Progress Confirmation

It is understood that the circumstance of insufficient foreign reserves is in the background, and it is a measure taken to curb the outflow of foreign currency. However, if this situation continues to overseas remittance, the whole business activities will have negative impact and it will lead to a vicious cycle of investment decline and trade decline. For Japanese firms too, remittances to headquarters and technology service providers have already been disturbed, and problems have arisen. The government intends to undertake a review, and it is desirable to confirm the progress on the status of alleviation and improvement on a regular basis.

3) Special Economic Zone (SEZ) Issue ＜Items to be Improved＞ In Karachi's SEZ where Japanese companies have factories, they have opinions that they feel stress about many inconsistent procedures and procedures that are different from the regulations, and no development of infrastructure such as electricity, water, and gas. In addition, tax exemption for corporation tax are not being carried out as described. In such circumstances, it is a big obstacle to attract Japanese companies in the future. In SEZ in Pakistan, tenant enterprises are subject to tax exemptions on corporate income for 10 years and one-time import exemption of capital goods to be constructed and installed in SEZ, and the Bin Qasim Industrial Park in the vicinity of Karachi is SEZ aimed at attracting Japanese companies. There are already two Japanese companies (motorcycle manufacturing and steel plate). However, according to them, the problem still continues. It seems that one of the reasons is that it is not possible to share sufficient information and unify intention among the relevant institutions such as NIP which operates industrial park, Sindh BOI, Federal government BOI, furthermore FBR which is in charge of tax incentives For example, the following problems were still left unattended. (1) despite the tax exemption of corporation tax, withholding tax with application of FTR and no refund at all, (2) frequently asked documents to be submitted to relevant organizations and becoming enormous volume, (3) NIP and original Land ownership issue is not solved with landowner state-owned enterprise, and lease contract cannot be concluded, (4) supply of electric power, water, and gas are not provided. It is inevitable that all institutions related to SEZ need to work on problems to solve quickly with awareness of the parties. Otherwise, it is a huge negative impact on investment from Japan as an impediment to the entry of Japanese companies.

＜Suggestions for Improvement＞ ◼ Reform of the SEZ Management System The management organization of SEZ's Bin Qasim Industrial Park is a state enterprise named National Industrial Park Development and Management Company (NIP). NIP, founded by the

Ministry of Production, is an organization to promote intensive industrial growth and development by developing nationwide industrial parks in Pakistan. However, in the case of Bin Qasim, not only NIP, the Sindh Investment Authority (BOI), the federal government BOI, FBR and other government agencies are also involved, and unification and information sharing are not carried out much among them. There are many opinions that various kinds of confusion occur. In this sense, it is better to reform it to a system that can strengthen the authority of NIP and correspond to one stop service through the single point of contact with reference to Industrial Estate Authority of Thailand (IEAT). Currently, the federal government BOI is talking about doing a one stop service, but it does not work as far as the actual situation is concerned. ◼ Referential Case in Thailand For example, IEAT in Thailand have established a one-stop service center, which includes purchasing and renting land related to IEAT, consulting about factory construction sites, applying for permission / approval of factory establishment, joint development of industrial parks, etc. · It can be done through one stop service center. In addition to the factory land in the industrial estate of IEAT, the infrastructure such as roads, drainage canals, wastewater treatment facilities, flood prevention systems, electricity, water supply, and telephone are maintained. Post offices, banks, shopping centers, Gas stations, and workers' lodgings can also be offered.

4) Security Concern ＜Items to be Improved＞ Security concerns to Pakistan have not yet been dispelled, but the situation has been greatly improved in recent years, and there are many opinions that Japanese companies need to rectify perception of security situation in Pakistan According to the Global Terrorist Index (GTI), Pakistan is the fourth most dangerous terrorist country in the world and more than 15,000 people have been victims of terrorism by 2015. The economic cost of terrorism has not only increased the police and military budget but also the decline in foreign investment and trade. However, the security of Pakistan has been improved in recent years, and since the beginning of the military sweeping operation, including the efforts to combat terrorism after 2014, the number of terrorist attacks and crime cases also decreased greatly. As a result, the number of terrorist attacks that exceeded 2,000 a year in 2012 has decreased to 800 in 2016. Given these circumstances, there are many opinions that Pakistan as "dangerous country" is still recognized excessively, and it is necessary to rectify the erroneous perception of Pakistan's security situation prevailing in Japan. Improving the image of the country can be expected to have a positive effect on promoting investment and trade.

＜Suggestions for Improvement＞

◼ Strengthen Publicity about Improvement of Security Situation Pakistan is still regarded as a country with high terrorist risk, however, its security situation has been greatly improved in recent years. Since there is not enough information about it in Japan, it is important to inform the fact that at least the security situation has been improved significantly in the last few years. It is important for the government to appeal it as a part of public relations activities. Efforts should be made to create promotional videos that improve the image of the country by incorporating the attractiveness of Pakistan if possible, as well as appealing it outside through the Internet.

5) Strengthening Automotive and Auto-parts Industry ＜Items to be Improved＞ Promotion of supporting industries for automotive sector is important, and it is also important industry for considering promotion of investment from Japan. Therefore, promoting investment from Japan in this industry should be enhanced. Although domestic production of automobiles in the country has increased in recent years to 270 thousand units level in 2016/17, it is still lower than the country's population size. The government implemented the Automotive Development Policy (ADP) in 2016 and aims to expand the domestic production of automobiles to 350,000 units by 2021 in the five year plan from 2016 to 2021. In addition, tax incentives are set up in ADP, and preferential treatment is given to newly entering makers (category A) and existing makers (category B). The existing makers have disadvantages in preferential tax rate and period. Since there are few benefits for them, they have a strong opinion that it is unfair for Japanese automotive manufacturers and it is requested to review the incentives. Used car import, which is an impediment factor to local automotive production, is prohibited in principle, and even when importing using personal cargo, relocation, gift system, it is limited to used cars with car age of less than 3 years. However, in fact, imports have sharply increased in improper way, and in 2017 the number of imported used cars was 87 thousand units increased by 52% compared with the previous year. Since the restrictions on used car import seems to be loose, strict application of import restrictions is necessary for development of the supporting industries and the creation of new employment in automotive industry. In addition, it is important to strengthen training of supporting industries for the future development of the automotive industry. However, there are problems such as poor technical strength of local parts manufacturers, lack of quality control, low motivation to introduce new technology. For further development, it is indispensable to train local component manufacturers by advancing overseas parts manufacturers. There is currently no specific condition for investment incentives and incentives for auto-parts manufacturers. Some preferential treatment is needed to promote Japanese parts

49 manufacturers' advancement in the future. In addition, in Pakistan, the environmental regulations are significantly behind compared with other countries, and as a result, the entry of Japanese products with environmental advantages is difficult. It is limitation on overseas export development. Improvement on the environmental regulations is also needed.

＜Suggestions for Improvement＞ ◼ Incentive Measures for Strengthening the Development of the Auto-parts Sector The automotive industry is closely related to Japan and is also an important target for Pakistan's future industrial development. Particularly strengthening training for auto-parts sector is indispensable for development of the automotive industry, and by attracting auto-parts manufacturers from Japan, it is possible to increase investment from Japan and to improve local procurement rate. Further, it leads to reduction of imports, improvement of technical skills of the sector, and creation of new jobs. Therefore, if the Pakistani government would investigate and realize investment incentives for attracting auto-parts manufacturers, it will lead to strengthen investment promotion, as well as many ripple effects such as a possibility of auto-parts export based on technological improvement and import reduction. ◼ Review on Incentives of ADP The tax incentive measures of ADP for automotive manufacturers are given a lot of preferential privileges for newly entering manufacturers and make the existing manufacturer feel unfair. However, the existing manufacturers are the actual driving force for the growth of the automotive industry, and it is desirable to provide them with the business environments that can make additional investment positively. Therefore, for the existing manufacturers, ADP should be revised to give the same incentives as those of newly entering manufacturers equally. ◼ Promotion of Public-Private Dialogue in the Automobile Industry In addition to the above suggestions, it is necessary to actively engage in information sharing and exchange of opinions by the government and automotive sector for the future development of the automotive industry referring to issues such as strict implementation on used car import regulations and improvement of environmental regulations. Solution efforts in concrete form by both government and automotive sector is desirable.

5-2 Improvement on Strengthening Bilateral Trade Relationship 5-2-1 Overview of Bilateral Trade Improvement in trade balance is an urgent issue in Pakistan, and it is urgent to develop textile and processed food products that account for about 60% to improve the trade balance and to develop new export items.

Although exports to Japan are generally sluggish, there is an opportunity for textile products that Japanese buyers have a tendency to look towards other countries besides China to secure suppliers other than China in the trend of “China Plus One”. Taking into consideration of the Japanese market which is the third largest market in the world, there is still plenty of rooms for Pakistan to expand exports to Japan, with the support of export promotion. Pakistani exporters should deepen the Japanese market research, by improving their response to product quality, design, price, delivery, etc. The Government of Pakistan makes the trade deficit resolution as a top priority by promoting export at the "Strategic Trade Policy Framework (STPF)" in 2013, which has important items of (1) focusing on intra-regional trade, (2) strengthening organization for export promotion, (3) Streamlining procedures of relevant government offices (4) New procedures for export development, (5) Expansion of exports from the developing areas of Pakistan, (6) Promotion of domestic trade to strengthen international competitiveness, and (7) Strengthening the verification and evaluation organization. However, it does not seem that these contents are functioning sufficiently. Further efforts should be made in order to expand exports in the future. Regarding exports to Pakistan from Japan, transportation equipment accounts for more than 50% of the total. It is estimated that exports will decrease if restraint on imported used cars will lead to increase in the local procurement rate of auto-parts. Meanwhile, Pakistan's domestic consumer market has a population of 200 million and further expansion is expected in the future. Therefore, further export expansion of Japanese brand products can be expected, especially in consumer goods sector.

5-2-2 Extraction of Issues We extracted comments on issues related to trade relationship with Pakistan obtained through the questionnaire survey and corporate interview. They are summarized as 2 items of the main issues such as 1) Issues on Trade Promotion, and 2) Issues on Export Items to Japan as shown below: １）Issues on Trade Promotion A.Enhancement of Advantages Major Issues Comments from Japanese Companies ・Even if Japan's import tariffs were at the same level as Advantages in comparison with India, Bangladesh and Vietnam, it would not motivate the other countries are required import unless it has a clear advantage over price, quality and delivery. ・Disadvantages on geographical distance with Japan, import Issues on Geographical distance cost and transport time

B. Corporate Response to Customers Major Issues Comments from Japanese Companies Improvement of Delivery time is ・It is necessary to improve the delivery of Pakistan side. required

・Due to mass production type, they cannot support a small Cannot deal with a small lot lot. ・Quality is unstable. Difficult for Stable supply. Quality & supply is not stable ・They cannot understand the quality level required in the Japanese market. ・It is difficult to have a good communication with Japanese to Language barriers problem be hindered by distances, words and cultural barriers

C. Administrative Issues Major Issues Comments from Japanese Companies

・Although there are export incentives, many cases are not Export incentives do not work actually implemented. It is not functioning. ・Government of Pakistan needs to make efforts to provide market information of export target countries. On the other Improvement of information hand, information on Pakistan is not sufficiently informed to provision ability the Japanese buyers. ・TDAP should have technical partnership with JETRO including improvement of information providing function. ・There is a problem with settlement of raw material import. Improvement of foreign currency · There are restrictions on remittance due to Pakistan's regulation foreign currency regulation. ・There is a problem with the tax system. Import tax may rise Improvement of taxation system suddenly. Unstable legal system ・Legal system changes frequently ・It is necessary to exempt tariffs on trade with Japan. Request for tariff exemption Purchasing costs are increased due to import tariffs in Japan. ・The tariff of Pakistan is high and even if tax exemption is High tariffs. Procedures are permitted at the time of importing, procedures may not be unstable carried out as described. ・It is necessary to improve the logistics of Pakistan. It affects Logistics improvement is needed stable supply.

D. Others (IT related, etc.) Major Issues Comments from Japanese Companies ・There is a possibility of having subcontract from developed countries for IT engineers. PC / software industry due to IT literacy improvement is promising. On the other hand, the level Expectation for IT human resources of education at vocational training schools is not necessarily development high and there is a system problem such as no national certification of graduation certificate. It is expected that Japanese IT companies' advance into Pakistan and IT human resources development by Japan. ・EC site for Japanese brand is expected due to sophistication EC business into Pakistan of consumption by economic growth is promising. ・It seems to be meaningful to hold events like Japan Brand Japan brand promotion should be Fair for introducing Japanese products and promoting future done trade and investment. However, it is not done currently due to security reasons.

２）Issues on Export Items to Japan

A. Textile Products Major Issues Comments from Japanese Companies ・Textile products from Pakistan are denim, home textile, Cannot diversify to other items knitted products only. Cannot diversify to other items There is no variety of synthetic fiber ・With cotton product limitation, there is no variety of products synthetic fiber products and not attractive to us. ・There are inexpensive products compared with other It is necessary to differentiate textile countries, but in addition to price, improvement is necessary products and establish superiority for quality, delivery, stable supply etc. It is also necessary to show differentiation and advantage.

B. Processed Foods Major Issues Comments from Japanese Companies ・There is a possibility and expectation to utilize abundant Should utilize agricultural and agricultural and marine resources and to handle processed marine resources foods as export products. ・In order to expand the business of processed foods and Support for logistics and processing fishery products, it is necessary to support cold chain logistics technology is needed and processing technology. Export expansion by processed ・Fruits, vegetables and rice will also lead to export expansion foods if they can be well processed.

5-2-3 Identification of Items to be Improved and Suggestions for Improvement Based on the information of issues related to the business environment in Pakistan considered by Japanese companies pointed out in 5-2-2, five major items are identified as improvement targets in the aspect of bilateral trade promotion. The items are 1) Strengthening Superiority and Differentiation, 2) Strengthening Facilitation Capacity for Trade Promotion, 3) Strengthening Competitiveness of Textile Industry, 4) Strengthening Export of Processed Foods, and 5) Strengthening IT Related Industry. The details are as follows:

1) Strengthening Superiority and Differentiation ＜Items to be Improved ＞ There are many cases compared with India and Bangladesh in South Asia, and many Japanese companies often think about Pakistan in terms of trade in comparison with these countries. Regarding exports to Japan, India and Bangladesh are already in advantageous position in terms of price comparison with Pakistan, since they had import duty exemption measures by FTA or LDC in trade with Japan. However, even if Pakistan gains tax exemption as well, there is no clear advantage in terms of quality, delivery, stable supply, etc., and it will not motivate the commencement of import

53 with Pakistan unless there is clear superiority and differentiation factor in products. In this sense, it is necessary for Pakistan to further enhance its efforts to provide products that meet the needs of the Japanese market, by enhancing competitiveness and its superiority. In addition, it is also necessary to develop and extract products that can demonstrate Pakistan's unique strengths in comparison with other countries, as well as strengthening differentiation. Regarding exports to Pakistan, priority is not yet high in the international expansion of Japanese companies. Their manpower is usually prioritized in India where the market is already larger. Considering in the same framework as India, They usually point out that Pakistan's advantage and differentiation are unknown in the region. However, many companies are basically interested in expansion of their business in Pakistan mainly for the domestic consumer market, focusing on Pakistan's market size and economic growth. Therefore, further appeal of Pakistan's attractiveness and advantage is needed.

＜Suggestions for Improvement＞ ◼ Strengthen appealing on advantages and differentiation While Pakistan is a country that can be expected on the size of the market and economic growth, on the other hand, it is always in the shade of India in South Asia. Japanese companies always put priority on India considering the market size, security, etc. In order to see not only India but also Pakistan, it is necessary to confirm the advantage and differentiation factors of Pakistan together with the publicity through public relations activities. Government organizations such as BOI and TDAP should prepare necessary publicity materials on the attractiveness and advantage of Pakistan and incorporate it into the external promotional activities.

2) Strengthening Facilitation Capacity for Trade Promotion ＜Items to be Improved＞ The government is implementing trade promotion activities through TDAP, and their activities mainly focus on arrangement of hosting exhibitions and dispatching delegation to overseas exhibitions, judging from the stagnation of exports in recent years, it cannot be considered as sufficient effects. The government has announced export incentive measures. The incentives shall be paid if the increase in exports exceeds the target level. However, according to Pakistani exporters and industrial groups, the fact is that it is not functioning effectively. Therefore, most of exporters have disappointment on the incentive measures. In order to increase the motivation of exporters to expand exports in the future, efforts should be made to make functioning of incentives effectively. In addition, although Pakistan exporters need more market information of export target countries, there is little provision of sufficient information since TDAP has focused on exhibition type promotion mainly. It is necessary to collect and analyze information on overseas markets and make it useful for

54 exporters. As well as strengthening information provision capability. There is a same story for importers in Japan. They pointed out that information of Pakistan's exporters and market information are lacking, and it is necessary to strengthen information provision and public relations activities on Pakistan’s market for foreign countries as well. In addition, as same as the case of investment promotion issues, Japanese importers pointed out issues on overseas remittance, high import duties, regulatory duty, and it is necessary to improve these issues for bilateral trade promotion also.

＜Suggestions for Improvement＞ ◼ Strengthen Facilitation Capacity of Government Agencies TDAP mainly focuses on holding exhibitions such as EXPO Pakistan and arranging various overseas delegation, however, compared with the activities of trade promotion organizations abroad such as JETRO, their activities are carried out only in a relatively narrow area. In order to contribute to further export growth, it is necessary to upgrade the activities of TDAP itself. I heard that research activities about overseas market information including Japan have just been started by TDAP, however, it is necessary to strengthen capacity, including exchange and cooperative relationship building with foreign trade promotion organizations. In addition, strengthening the business matching ability is also important. It is necessary to actively create opportunities for business transactions, not only exhibitions nor business meetings but also efforts like business matching through internet. The matching by internet have already been carried out by Thai trade promotion organization, DITP. Further, since the current export incentive measures do not seem to be functioning effectively, the government should also announce export incentive measures with effectiveness to raise the motivation of exporters.

3) Strengthening Competitiveness of Textile Industry ＜Items to be Improved＞ Although textile products are an important export item that accounts for more than 50% of the total export value of Pakistan, exports have been declining in recent years. Many of the export items of textiles are commodity type such as cotton yarns and fabrics, and these products are more sensitive to the price trend of the market because the added value is low. Therefore, it seems that the decline in cotton yarn prices in recent years is also affecting the decrease in exports. In that sense, it is necessary to strengthen the export of high value-added products such as home textiles and apparel. Japan is the third largest textile market in the world, and strengthening the export of high value added products to Japan can be an important key for Pakistan's textile exports that has been mainly for the western markets to a large extent.

Meanwhile, Japanese textile importers show several issues related to Pakistan's home textiles and apparel products. The following two points are major issues: ➢ Because denim, home textile, knit products are limited to products manufactured with cotton yarn of the thick count, there is no variety of synthetic fiber products and it cannot be diversified into other items. The attractiveness is diminished and containers cannot be filled sufficiently. ➢ Textile products are relatively inexpensive compared with other countries, however, besides price, it is necessary to improve quality, delivery, stable supply etc. It is necessary to improve differentiation and advantage. Therefore, even if tax exemption measures would be taken, unless efforts are made to solve the above problems, it would not lead to an increase of exports to Japan simply. After fully understanding and recognizing the needs and countermeasures of the Japanese market, it is necessary to strengthen the competitiveness of the textile industry supported by both public and private sector as a whole.

＜Suggestions for Improvement＞ ◼ Strategic Approach to the Japanese Market and Differentiation In Japan, the trend of "China Plus One" is progressing for diversifying suppliers other than China, and, in this sense, it is an good opportunity for Pakistan to expand its export into the Japanese market, focusing on areas where Pakistan's strengths can be utilized and export promotion activities should be continued. They should respond in line with the strategic approach and export promotion activities to the Japanese market, in cooperation with parties concern in the industry. It is also desirable to examine the comparative advantages of competing countries in Asia and build a system that can further appeal in the Japanese market by enhancing Pakistan's strengths and differentiation factors.

◼ Strengthen International Competitiveness of Textile Companies Japanese companies generally have very strict criteria for quality, inspection and delivery. This point is taken up as a problem frequently in dealing with Pakistan exporters. As for the delivery, Japanese textile industry has many seasonal changes in the fashion season, delaying the delivery is a fatal problem. Moreover, there are still plenty of rooms for improvement in production management, quality control, inspection, etc. in Pakistani textile companies, and it is necessary for public and private sectors to make efforts to improve business behavior and strengthen international competitiveness. For example, it is desirable to conduct educational activities such as seminars for improvement, technical assistance by experts or educational activities and training for senior and middle managers of corporate management through government support.

4) Strengthening Export of Processed Foods ＜Items to be Improved＞

Agricultural & marine products and processed foods are Pakistan's second largest export items next to textile products. However, agricultural and marine resources of Pakistan have not fully been utilized, and it is said that 40% of the total agricultural products has been disposed. Therefore, both Japan and Pakistan are concerned about the possibility and expectation for handling processed foods as export products by utilizing abundant agricultural and fisheries resources. Especially, there are opinions that it will lead to future export expansion by commercializing agricultural products such as fruits, vegetables, and rice as processed foods. Regarding marine products, Pakistan has not used them as much for food in the past, shrimp and crab, squid and octopus are not often eaten mainly due to religious reasons. Therefore, the marine resources are very well conditioned and abundant, and it is expected to be utilized for export. On the other hand, in order to extend the business of processed foods and fishery products for export, it is necessary to further improve the level of logistics such as cold chain and processing technology, and support from Japan in this field would be important.

＜Suggestions for Improvement＞ ◼ Strengthening the processed food industry Pakistan has focused on fresh agricultural products such as fresh mango for export to Japan, however, not only fresh products, but also processed foods such as juice, puree, pulp and dried fruits have a possibility to enter Japanese market. Therefore, export promotion activities of these processed foods should be carried out. Recently, mango related drinks and desserts have come to be seen in Japan a lot, and demand has surely increased. Therefore, there are many opportunities to enter the market. In addition, since there should be rooms for entry of other fruits and nuts besides mangoes, it is desirable that efforts shall be made to explore. For example, dry dates are exported to Japan through a trading company as a raw material of sauce. As for fishery processed products, shrimp has already been processed into freeze-dried in China via trading companies. It is worth considering to support for expanding export of processed foods from Japan through effective utilization of marine resources.

◼ Promoting the Export of Halal Food Pakistan has the world's second largest Muslim population next to Indonesia, and the leading producer of "Halal food" for Muslims. Currently, about 1.6 billion people, more than 20% of the world population, are Muslims and are expected to increase further in the future. It is said that about 200,000 Muslims live in Japan and the number of tourism population for Japan from Islamic countries in Asia such as Indonesia and Malaysia have also increased in recent years. Therefore, it can be considered that Japanese companies will have partnership with Pakistan to develop a variety of Halal food

57 products and to establish a scheme to export not only to Japan but also to Islamic markets around the world after obtaining Halal certification.

5) Strengthening IT related industry ＜Items to be Improved＞ Pakistan's IT industry has been growing in recent years and is considered to be expanded in the future. IT exports from 2016 to 2017 are 3.3 billion dollars and are expected to grow to 6 billion dollars over the next few years. The breakdown consists of 17% enterprise software, 15% marketing technology, 13% financial services, 9% consumer goods, 8% retail / electronic commerce. In addition, major IT companies such as Amazon are expecting Pakistan startup companies, and the government has started to promote startup companies through the government fund “Ignite”. Both Pakistan and Japan pointed out that IT engineers have a good potential for subcontracting from developed countries and growth is expected in export. On the other hand, there are indications that the level of education at vocational training schools is not high, and according to a local company that develops software for Japan, smooth interaction can be done in the business with Japanese interpreter. There are circumstances and view that training of Japanese language human resources is also needed. Japanese IT companies are expected to enter Pakistan and train IT human resources. In addition, e- commerce is promising due to sophistication of consumption accompanying economic growth. Advancement of Japanese companies in this field may lead to promotion of trade including domestic sales of Japanese products in the future.

＜Suggestions for Improvement＞ ◼ Enhance Business Matching in IT Sector According to PSEB (Pakistan Software Export Association), there are about 5 thousand IT companies and about 300 thousand IT engineers in Pakistan, with about 20 thousand new graduates every year as a new labor force in the IT industry. The cost of software development is about 20% cheaper than India. In order to attract IT companies, the government provides various incentives. It is desirable for Pakistan to do promotion activities to Japan so that the Pakistan IT industry can obtain understanding through seminars and pitch events. Together, it is desirable that activities such as establishing cooperative relations with JETRO and IT industry organizations in Japan, strengthening business matching between the two countries, and enabling new transactions and business creation.

◼ IT Human Resource Development Pakistan is requesting Japanese government to support IT human resource development as well as expecting that IT engineers in Pakistan can work in Japan in the future. In this regard, it is a good reference that JICA’s technical assistance has been provided to Bangladesh in IT sector.

5-3 Possibilities of FTA 5-3-1 Japan’s FTAs As of the end of 2018, Japan has signed or 18 economic partnership agreements (EPAs) (Table 5- 1). The proportion of trade with these partner countries accounts for 51.6% of total trade (36.5% in the case of TPP 11 excluding the United States). "Growth Strategy 2018" aims at raising EPA/FTA ratio to 70% of total trade by 2018 as a policy objective. However, the ratio of EPA/FTAs of total trade reaches 85.8% when trade volume of partners under EPA negotiation is included besides existing EPAs already in effect and signed. Countries and regions under negotiation are Canada, Colombia, China, Korea, East Asia Regional Comprehensive Economic Partnership (RCEP), Turkey, Gulf Cooperation Council (GCC) such as United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait (Figure 5-1）.

Table 5-1 EPAs and FTAs in Japan (in effect and signed)

Year of Entry Year of Entry Country/Region Country/Region into Force into Force 2002 Singapore 2009 Switzerland 2005 Mexico 2009 Vietnam 2006 Malaysia 2011 India 2007 Chile 2012 Peru 2007 Thailand 2015 Australia 2008 Indonesia 2016 Mongolia 2008 Brunei 2018 TPP11 2008 ASEAN 2018 TPP12（Signed） 2008 Philippines 2019 Japan-EU EPA Source：MOFA website

Figure 5-1 Share of Trade Value of Countries and Regions in Japan’s Total Trade

Source：MOFA website

According to Article 24 of the GATT, the FTA in trade in goods is justified as an exception to the most-favored-nation treatment principle when such requirement as the abolition of tariffs on substantially all the trade items between the members is vertically satisfied. Regarding the interpretation of substantially all trade items, it is generally considered that there is a criterion that 90% of tariff in terms of trade value is eliminated within 10 years10. In the case of FTAs between developing countries, it is possible to apply the enabling clause which says that it is not necessarily to satisfy the requirement of GATT Article 24. However, in the case of FTA between the developed and developing countries, the enabling clause is not allowed. When Japan negotiates FTA with developing countries, both Japan and the partner country must fulfill the obligation of Article 24 of GATT11.

10 Tadashi Yasui, Report on the status of Japanese EPAs (August 2006) on “The Finance” Vol. 42, No.5 published by MOF 11 Keiishi Baba, Report on Trade policies, Bunshin-do, 2005

5-3-2 Pakistan’s FTAs （１）Pakistan’s FTA/PTA partners and countries under negation In Pakistan, the chronic trade deficit continues, and "Vision 2025" sets a target to increase the export from US $ 25 billion in 2014 to US$ 150 billion in 2025. In recent years, MOC launched Strategic Trade Policy Framework (STPF 2015 - 2018) 12 and exerted efforts to increase exports to US$ 35 billion in FY2018. Pakistan has signed a preferential tariff agreement (PTA) with six countries and SAARC (South Asia Association for Regional Cooperation). While PTA is a reduction of tariffs on partial items, the FTA attempts to eliminate tariffs on all items. Pakistan signed FTA with China and Malaysia, and singed PTA with Indonesia, Iran, Mauritius and Indonesia. Overall, the amount of trade between Pakistan and FTA/PTA partners is small except for China and Indonesia. Pakistan's FTA and PTA partners are all developing countries, and hence it is possible to apply the enabling clause. This exempts Pakistan from the requirement of Article 24 of GATT and make it possible to sign PTA. Countries under negotiation or joint research are illustrated in Table 5-2 Pakistan has not singed any FTAs since FTA with Indonesia in 2013. Recently, Pakistan and Indonesia are in the process of reviewing the PTA. Indonesian Trade Minister Enggartiasto Lukita suggested that it could be followed up with a FTA13.

Table 5-2 Pakistan’s FTAs under negotiation

Country Status

Bangladesh In November 2003, FTA negotiations began. In August 2015, negotiations on FTA was restarted for the first time in 10 years. Nine Thailand negotiations have been held. In August 2005 negotiations on comprehensive FTA including trade, investment and services Singapore began, and the third negotiation was completed. In June 2006, the 8th Pakistan Jordan Joint Ministerial Committee agreed to start FTA Jordan negotiations. Brunei In August 2008, the third meeting for FTA was held in Islamabad.

Morocco In December 2009, negotiations on PTA started.

Turkey In September 2015, negotiations on PTA began. FTA negotiations have been held six times.

Saudi Arabia In October 2018, both parties agreed to enter FTA negotiations. Source: JETRO website

12 https://www.tdap.gov.pk/pdf/trade_policy_18.pdf 13 https://tribune.com.pk/story/1840613/2-pakistan-indonesia-pta-upgraded-fta/

（２）Trends in Trade between Pakistan and FTA Partner Countries  China For Pakistan, China is the third largest export destination following the United States and the U.K., and the top importer in 2017. Cotton cloth and cotton thread account for about 60% of Pakistan’s export to China, and there are other major export items such as chromium ore, rice, fishes and crustaceans, medical instruments, etc. Top 10 items (HS 6-digit) of Pakistan’s export items account for about 70% of all export. There are two phases in Pakistan’s FTA with China: the first phase started from 2007 to 2012 (signed in January 2006 and put into effect July 2017) whereas the second phase was originally scheduled to start from 2012. In the first phase, Pakistan gave concession to 6711 items while China gave concession to 6,418 items14 . The second phase is still under negotiation and it has not reached a consensus as of February 2019. Of the items subject to tariff reduction by the FTA, only 4% of items are exported from Pakistan to China whereas there are more than 60% of items exported from China to Pakistan. This suggests that diversification of Pakistan’s export items is not enough.

Table5-3 Top10 products (HS6 digits）in Pakistan’s Trade with China(HS6 digits)

Exports (2007) US$ thousand Exports （2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％ Single cotton yarn, of uncombed fibres, Single cotton yarn, of uncombed fibres, '520512 containing >= 85% cotton by weight and with 123,802 20% '520512 containing >= 85% cotton by weight and with 623,960 41% a linear ... a linear ... '261000 Chromium ores and concentrates 86,606 14% '261000 Chromium ores and concentrates 94,097 6% Multiple "folded" or cabled cotton yarn, of Semi-milled or wholly milled rice, whether or '520532 uncombed fibres, containing >= 85% cotton 64,398 10% '100630 79,456 5% not polished or glazed by weight ... Single cotton yarn, of combed fibres, Single cotton yarn, of uncombed fibres, '520522 containing >= 85% cotton by weight and with 45,997 7% '520511 containing >= 85% cotton by weight and with 74,744 5% a linear ... a linear ... Single cotton yarn, of uncombed fibres, Woven fabrics of cotton, containing >= 85% '520511 containing >= 85% cotton by weight and with 36,391 6% '520912 cotton by weight and weighing > 200 g/m², in 41,524 3% a linear ... three-thread ... Multiple "folded" or cabled cotton yarn, of Multiple "folded" or cabled cotton yarn, of '520531 uncombed fibres, containing >= 85% cotton 14,011 2% '520532 uncombed fibres, containing >= 85% cotton 33,975 2% by weight ... by weight ... Hides and skins of bovine "incl. buffalo" or Single cotton yarn, of combed fibres, '410449 equine animals, in the dry state "crust", 13,121 2% '520522 containing >= 85% cotton by weight and with 30,964 2% without ... a linear ... Frozen freshwater and saltwater fish Plain woven fabrics of cotton, containing >= '030379 (excluding salmonidae, flat fish, tunas, 12,005 2% '520812 85% cotton by weight and weighing > 100 g to 28,771 2% skipjack or stripe-bellied ... 200 ... Woven fabrics of cotton, containing Instruments and appliances used in geodesy, '521211 predominantly, but < 85% cotton by weight, 11,277 2% '901580 topography, hydrography, oceanography, 23,652 2% other than those ... hydrology, ... Woven fabrics of cotton, containing >= 85% Marble and travertine, merely cut, by sawing '520819 cotton by weight and weighing <= 200 g/m², 11,175 2% '251512 or otherwise, into blocks or slabs of a square 20,959 1% unbleached ...... Others 194,976 32% Others 455,978 30% Total 613,759 100% Total 1,508,080 100%

14 http://www.commerce.gov.pk/about-us/trade-agreements/pak-china-free-trade-agreement-in-goods-investment/

Imports (2007) US$ thousand Imports （2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％ Transmission apparatus incorporating Photosensitive semiconductor devices, incl. '852520 reception apparatus, for radio-telephony, 392,506 9% '854140 photovoltaic cells whether or not assembled 627,009 4% radio-telegraphy, ... in ... Transmission apparatus for radio-telephony, Telephones for cellular networks "mobile '852510 radio-telegraphy, radio-broadcasting or 221,551 5% '851712 513,253 3% telephones" or for other wireless networks television Diammonium hydrogenorthophosphate '999999 Commodities not elsewhere specified 126,277 3% '310530 "diammonium phosphate" (excluding that in 450,289 3% tablets or similar ... Diammonium hydrogenorthophosphate Watertube boilers with a steam production > '310530 "diammonium phosphate" (excluding that in 115,100 3% '840211 430,161 3% 45 t/hour tablets or similar ... Coke and semi-coke of coal, of lignite or of Flat-rolled products of alloy steel other than '270400 peat, whether or not agglomerated; retort 101,528 2% '722530 stainless, of a width of >= 600 mm, not 401,977 3% carbon further ... Staple fibres of polyesters, not carded, '550320 58,913 1% '850231 Generating sets, wind-powered 319,029 2% combed or otherwise processed for spinning Potassium sulphate (excluding that in tablets Machines for the reception, conversion and '310430 or similar forms, or in packages with a gross 58,517 1% '851762 transmission or regeneration of voice, images 257,144 2% ... or ... New pneumatic tyres, of rubber, of a kind '070320 Garlic, fresh or chilled 58,154 1% '401120 used for buses and lorries (excluding typres 168,723 1% with ... Ammonium dihydrogenorthophosphate '310540 "monoammonium phosphate", whether or not 51,153 1% '841430 Compressors for refrigerating equipment 148,750 1% mixed with diammonium ... New pneumatic tyres, of rubber, of a kind Generating sets (excluding wind-powered and '401120 used for buses and lorries (excluding typres 50,952 1% '850239 powered by spark-ignition internal 124,519 1% with ... combustion piston ... Others 2,929,579 70% Others 11,942,544 78% Total 4,164,230 100% Total 15,383,398 100%

Source：ITC TRADE MAP

 Indonesia The negotiations of PTA began in August 2003, and the tariff rate of palm oil had been a point of contention for Indonesia while that of Kinnow had been an issue for Pakistan. After the negotiations of eight rounds, both parties agreed to sign PTA in February 2012 and thereafter PTA was put into force in September 2013. Consequently, Indonesia’s 216 items and Pakistan’s 287 items were subject to either tariff elimination or tariff reduction measures.

Table5-4 Top10 products (HS6 digits）in Pakistan’s Trade with Indonesia Exports (2013) US$ thousand Exports （2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％

'520100 Cotton, neither carded nor combed 39,864 28% '520100 Cotton, neither carded nor combed 28,051 17%

'100640 Broken rice 19,921 14% '100640 Broken rice 18,950 11% Woven fabrics of cotton, containing >= 85% Paper and paperboard, surface-coloured, '520932 cotton by weight and weighing > 200 g/m², in 14,143 10% '481159 surface-decorated or printed, coated, 17,641 11% three-thread ... impregnated or ... Semi-milled or wholly milled rice, whether or Fresh or dried wilkings and similar citrus '100630 7,095 5% '080529 17,235 10% not polished or glazed hybrids Semi-milled or wholly milled rice, whether or '100590 Maize (excluding seed for sowing) 5,043 3% '100630 11,418 7% not polished or glazed Master alloys of copper (excluding Tanks, casks, drums, cans, boxes and similar '740500 phosphorus-copper compounds copper 4,482 3% '731029 10,759 6% containers, of iron or steel, for any material, ... phosphide" containing ... Frozen flat fish "Pleuronectidae, Bothidae, Woven fabrics of cotton, containing >= 85% '030339 Cynoglossidae, Soleidae, Scophthalmidae and 4,327 3% '520932 cotton by weight and weighing > 200 g/m², in 9,440 6% Citharidae" ... three-thread ... Waste and scrap, of copper (excluding ingots Fresh or dried mandarins incl. tangerines and '740400 or other similar unwrought shapes, of 3,943 3% '080521 3,616 2% satsumas (excl. clementines) remelted ... Flours, meals and pellets of fish or Grain splits leather "incl. parchment-dressed '230120 crustaceans, molluscs or other aquatic 3,549 2% '410712 leather", of the whole hides and skins of 3,498 2% invertebrates, ... bovine ... Woven fabrics of cotton, containing >= 85% Frozen flat fish "Pleuronectidae, Bothidae, '520839 cotton by weight and weighing <= 200 g/m², 2,933 2% '030339 Cynoglossidae, Soleidae, Scophthalmidae and 3,222 2% dyed ... Citharidae" ... Others 39,080 27% Others 41,758 25% Total 144,380 100% Total 165,588 100%

Imports (2013) US$ thousand Imports （2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％ Palm oil and its fractions, whether or not Palm oil and its fractions, whether or not '151190 refined (excluding chemically modified and 953,605 50% '151190 refined (excluding chemically modified and 392,500 36% crude) crude) Medium oils and preparations, of petroleum '271019 or bituminous minerals, not containing 385,463 20% '151110 Crude palm oil 84,341 8% biodiesel, ... Medium oils and preparations, of petroleum '151110 Crude palm oil 191,804 10% '271019 or bituminous minerals, not containing 40,833 4% biodiesel, ... Oilcake and other solid residues, whether or Vessels and other floating structures for '890800 29,939 2% '230660 not ground or in the form of pellets, resulting 34,986 3% breaking up ... Filament yarn of polyester, incl. monofilament Filament yarn of polyester, incl. monofilament '540247 14,446 1% '540247 26,253 2% of < 67 decitex, single, untwisted or with a ... of < 67 decitex, single, untwisted or with a ... Vessels and other floating structures for '841430 Compressors for refrigerating equipment 13,912 1% '890800 18,794 2% breaking up Fatty acids, industrial, monocarboxylic; acid Vegetable fats and oils and their fractions, '382319 oils from refining (excluding stearic acid, 13,581 1% '151620 partly or wholly hydrogenated, inter- 16,954 2% oleic ... esterified, ... Data-processing machines, automatic, Textured filament yarn of polyester '540233 10,511 1% '847130 portable, weighing <= 10 kg, consisting of at 13,609 1% (excluding that put up for retail sale) least a ... '390230 Propylene copolymers, in primary forms 9,892 1% '293040 Methionine 13,465 1% Fibreboard of wood or other ligneous Window or wall air conditioning machines, '841510 9,531 0% '441193 materials, whether or not agglomerated with 12,840 1% self-contained or "split-system" resins or ... Others 287,053 15% Others 446,430 41% Total 1,919,737 100% Total 1,101,005 100% Source：ITC TRADE MAP

 Malaysia The Early Harvest Program (EHP) was implemented from January 1, 2006. Malaysia abolished tariff on 114 items whereas Pakistan abolished tariff on 125 items 15 . In November 2007, a comprehensive free trade agreement (FTA) was concluded and it came into effect in January 2008. For trade in Goods Pakistan will eliminate tariff on 43.2% of the current imports from Malaysia by 2012. On the other hand, Malaysia will eliminate tariff on 78% of imports from Pakistan16. Malaysia FTA is the first comprehensive FTA for Pakistan, including trade in goods, service trade, investment and economic cooperation, and both countries agreed to review the agreement every five years. Among Pakistan’s top five export items (6th digit HS) to Malaysia, rice accounts for 13% of the total export value, while fish accounts for 7%, bed linen for 6%, apparel for (5%), and light vessel for 5%. Although rice is the largest item exported to Sri Lank, preferential tariff is not applied to rice.

15 http://www.commerce.gov.pk/about-us/trade-agreements/pak-malaysia-early-harvest-programme/ 16 http://www.commerce.gov.pk/about-us/trade-agreements/pak-malaysia-trade-agreements/

Table 5-5 Top10 products (HS6 digits）in Pakistan’s Trade with Malaysia

Exports (2008) US$ thousand Exports (2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％ Semi-milled or wholly milled rice, whether or Semi-milled or wholly milled rice, whether or '100630 23,721 17% '100630 16,294 13% not polished or glazed not polished or glazed Frozen flat fish "Pleuronectidae, Bothidae, '100590 Maize (excluding seed for sowing) 11,581 8% '030339 Cynoglossidae, Soleidae, Scophthalmidae and 9,417 7% Citharidae" ... Bedlinen of textile materials (excluding of Frozen mackerel (Scomber scombrus, '030374 6,479 5% '630239 cotton and man-made fibres, printed, knitted 7,311 6% Scomber australasicus, Scomber japonicus) or ... Articles of apparel, of leather or composition Men's or boys' ensembles of cotton '420310 leather (excluding clothing accessories, 4,881 4% '620322 (excluding knitted or crocheted, ski 6,554 5% footware ... ensembles and swimwear) Bedlinen of cotton (excluding printed, knitted Light-vessels, fire-floats, floating cranes and '630231 4,401 3% '890590 6,481 5% or crocheted) other vessels, the navigability of which is ... Toilet linen and kitchen linen, of terry Double salts and mixtures of ammonium '630260 towelling or similar terry fabrics of cotton 4,304 3% '310229 sulphate and ammonium nitrate (excluding 5,394 4% (excluding ... goods of this ... Hulled, pearled, sliced, kibbled or otherwise '110423 worked maize grains (excluding rolled, flaked, 4,054 3% '070310 Fresh or chilled onions and shallots 5,083 4% ... Toilet linen and kitchen linen, of terry '100640 Broken rice 3,669 3% '630260 towelling or similar terry fabrics of cotton 4,318 3% (excluding ... Multiple "folded" or cabled cotton yarn, of Gelatin, whether or not in square or '520532 uncombed fibres, containing >= 85% cotton 3,135 2% '350300 rectangular sheets, whether or not surface- 4,049 3% by weight ... worked or coloured, ... Frozen freshwater and saltwater fish '030379 (excluding salmonidae, flat fish, tunas, 3,112 2% '070190 Fresh or chilled potatoes (excluding seed) 3,905 3% skipjack or stripe-bellied ... Others 68,731 50% Others 60,260 47% Total 138,068 100% Total 129,066 100%

Imports (2008) US$ thousand Imports (2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％ Palm oil and its fractions, whether or not Palm oil and its fractions, whether or not '151190 refined (excluding chemically modified and 901,924 9% '151190 refined (excluding chemically modified and 392,500 4% crude) crude) '151110 Crude palm oil 314,615 5% '151110 Crude palm oil 84,341 3% Data-processing machines, automatic, Medium oils and preparations, of petroleum '847130 portable, weighing <= 10 kg, consisting of at 24,392 3% '271019 or bituminous minerals, not containing 40,833 3% least a ... biodiesel, ... Oilcake and other solid residues, whether or Polyethylene with a specific gravity of < 0,94, '390110 19,088 3% '230660 not ground or in the form of pellets, resulting 34,986 3% in primary forms ... Natural rubber latex, whether or not Filament yarn of polyester, incl. monofilament '400110 18,234 2% '540247 26,253 3% prevulcanised of < 67 decitex, single, untwisted or with a ... Filament yarn of polyester, incl. monofilament Vessels and other floating structures for '540247 16,165 1% '890800 18,794 2% of < 67 decitex, single, untwisted or with a ... breaking up Vegetable fats and oils and their fractions, Polyethylene with a specific gravity of >= '390120 14,685 1% '151620 partly or wholly hydrogenated, inter- 16,954 2% 0,94, in primary forms esterified, ... Data-processing machines, automatic, '841430 Compressors for refrigerating equipment 13,681 1% '847130 portable, weighing <= 10 kg, consisting of at 13,609 1% least a ... '291521 Acetic acid 12,992 1% '293040 Methionine 13,465 1% Fibreboard of wood or other ligneous '291612 Esters of acrylic acid 11,948 1% '441193 materials, whether or not agglomerated with 12,840 1% resins or ... Others 1,693,664 70% Others 446,430 78% Total 4,164,230 100% Total 1,101,005 100% Source：ITC TRADE MAP

 Sri Lanka FTA between Pakistan and Sri Lanka was concluded in August 2002 and it came into operation in July 2005. Immediately after FTA being into force, immediate elimination of tariffs was conducted for Pakistan’s 206 products and for Sri Lanka’s 102 items (HS6 digits). Except for the items not subject to tariff reduction (HS 6 digits), namely Sri Lanka’s 607 items and Pakistan’s 540 items, Pakistan and Sri Lanka aim at eliminating tariffs of other items by 2010 and 2008, respectively17. In 2017, top 10 Pakistan’s export items (HS6 digits) to Sri Lanka are cement, cotton fabrics, medicaments, salt, rice, and ethyl alcohol and others, all of which account for over 50% of Pakistan’s total export to Sri Lanka.

Table5-6 Top10 products (HS6 digits）in Pakistan’s Trade with Sri Lanka

Exports (2005) US$ thousand Exports (2017) US$ thousand HS Product Label Value ％ HS Product Label Value ％ Woven fabrics of cotton, containing >= 85% Portland cement (excluding white, whether or '520819 cotton by weight and weighing <= 200 g/m², 22,645 15% '252329 24,988 9% not artificially coloured) unbleached ... Woven fabrics of cotton, containing Woven fabrics of cotton, containing >= 85% '521213 predominantly, but < 85% cotton by weight, 20,980 14% '520932 cotton by weight and weighing > 200 g/m², in 24,147 9% other than those ... three-thread ... Semi-milled or wholly milled rice, whether or Semi-milled or wholly milled rice, whether or '100630 6,613 4% '100630 15,883 6% not polished or glazed not polished or glazed Line pipe of a kind used for oil or gas Double salts and mixtures of ammonium '730610 pipelines, of iron or steel, of an external 6,527 4% '310229 sulphate and ammonium nitrate (excluding 15,309 6% diameter ... goods of this ... Single cotton yarn, of uncombed fibres, Medicaments consisting of mixed or unmixed '520512 containing >= 85% cotton by weight and with 5,079 3% '300490 products for therapeutic or prophylactic 13,134 5% a linear ... purposes, ... Medicaments consisting of mixed or unmixed Tubes, pipes and hollow profiles "e.g., open '300490 products for therapeutic or prophylactic 4,672 3% '730690 10,954 4% seam, riveted or similarly closed", of iron or ... purposes, ... Denim, containing >= 85% cotton by weight '630621 Tents of cotton (excluding fly sheets) 4,374 3% '520942 and weighing > 200 g/m², made of yarn of 10,638 4% different ... Dried fish, even salted but not smoked '030559 3,923 3% '070190 Fresh or chilled potatoes (excluding seed) 7,527 3% (excluding fillets, offal and cod) Medicaments containing hormones or Poly"vinyl chloride", in primary forms, not '390410 3,858 3% '300439 steroids used as hormones but not 7,268 3% mixed with any other substances antibiotics, put up in ... Woven fabrics of cotton, containing Undenatured ethyl alcohol, of actual alcoholic '521223 predominantly, but < 85% cotton by weight, 3,435 2% '220710 6,576 2% strength of >= 80% other than those ... Others 71,556 47% Others 132,494 49% Total 153,662 100% Total 268,918 100%

17 http://www.commerce.gov.pk/about-us/trade-agreements/pak-srilanka-free-trade-agreement/

 Iran Pakistan signed PTA with Iran in 2004 and was in force in 2006. Pakistan reduced tariff on 338 items and Iran reduced tariff on 309 items (HS6 digits). Pakistan’s imports from Iran rapidly increased, but thereafter due to the impact of UN sanctions against Iran, trade volumes shrank sharply18. In 2017, Pakistan's exports of top 10 products at HS6 digit account for 96% of total export. Paper and paperboard have a large share of exports, accounting for 68%, followed by rice accounts of 10%. Meanwhile, Pakistan’s import of petroleum from Iran accounts for 57% of total import, whereas fruits and ceramics products accounts for 10% and 7%, respectively.

Table 5-7 Top10 products (HS6 digits）in Pakistan’s Trade with Iran

Exports (2006) US$ thousand Exports （2017） US$ thousand HS Product Labe Value ％ HS Product Labe Value ％ Paper and paperboard, surface-coloured, Semi-milled or wholly milled rice, whether or '100630 109,954 62% '481159 surface-decorated or printed, coated, 18,170 68% not polished or glazed impregnated or ... Articles of apparel, of leather or composition Semi-milled or wholly milled rice, whether or '420310 leather (excluding clothing accessories, 12,570 7% '100630 2,720 10% not polished or glazed footware ... Bars and rods, of iron or non-alloy steel, with Stoppers, lids, caps and other closures, of '721420 indentations, ribs, groves or other 6,229 3% '392350 1,043 4% plastics deformations ... Acrylic or modacrylic staple fibres, not Plates, sheets, film, foil and strip, of non- '550330 carded, combed or otherwise processed for 5,930 3% '392010 cellular polymers of ethylene, not reinforced, 1,037 4% spinning ... Fresh or dried mandarins incl. tangerines and Blankets and travelling rugs of synthetic '080520 satsumas, clementines, wilkings and similar 4,917 3% '630140 fibres (excluding electric, table covers, 680 3% citrus ... bedspreads ... Food preparations for infant use, put up for Instruments and appliances used in medical, '190110 3,881 2% '901890 675 3% retail sale, of flour, groats, meal, starch or ... surgical or veterinary sciences, n.e.s. Woven fabrics of jute or of other textile bast Vessels for the transport of goods and '531090 fibres of heading 5303, bleached, dyed, made 3,109 2% '890190 vessels for the transport of both persons and 552 2% ... goods ... Synthetic staple fibres carded, combed or Tortoiseshell, whalebone and whalebone hair, '550690 otherwise processed for spinning (excluding 1,895 1% '050790 horns, antlers, hooves, nails, claws and 317 1% acrylic, ... beaks, ... Woven fabrics of cotton, containing Air pumps, air or other gas compressors and '521213 predominantly, but < 85% cotton by weight, 1,757 1% '841480 ventilating or recycling hoods incorporating a 238 1% other than those ...... '100640 Broken rice 1,262 1% '120740 Sesamum seeds, whether or not broken 124 0%

Others 27,278 15% Others 978 4% Total 178,782 100% Total 26,534 100%

18 http://www.commerce.gov.pk/about-us/trade-agreements/pak-iran-preferential-trade-agreement/

Imports (2006) US$ thousand Imports （2017） US$ thousand HS Product Labe Value ％ HS Product Labe Value ％ Gaseous hydrocarbons, liquefied, n.e.s. Petroleum oils and oils obtained from '270900 151,913 34% '271119 (excluding natural gas, propane, butane, 55,816 17% bituminous minerals, crude ethylene, ... Waste and scrap of iron or steel (excluding Light oils and preparations, of petroleum or '720449 slag, scale and other waste of the production 80,146 18% '271012 bituminous minerals which >= 90% by 44,685 14% of ... volume "incl. ... '290243 P-Xylene 26,073 6% '271320 Petroleum bitumen 37,864 12% Non-agglomerated iron ores and concentrates '260111 19,332 4% '271600 Electrical energy 33,099 10% (excluding roasted iron pyrites) Flat-rolled products of iron or non-alloy steel, Ceramic flags and paving, hearth or wall tiles, '720810 10,382 2% '690723 24,268 7% of a width of >= 600 mm, in coils, simply ... of a water absorption coefficient by weight ... Unwrought zinc, not alloyed, containing by Vessels and other floating structures for '790112 8,367 2% '890800 15,408 5% weight < 99,99% of zinc breaking up Medium oils and preparations, of petroleum Polyethylene with a specific gravity of >= '390120 7,202 2% '271019 or bituminous minerals, not containing 13,947 4% 0,94, in primary forms biodiesel, ... Bars and rods, of iron or non-alloy steel, with '721420 indentations, ribs, groves or other 5,962 1% '080810 Fresh apples 13,921 4% deformations ... Skins of sheep or lambs, in the wet state Waste and scrap of iron or steel (excluding '410510 "incl. wet-blue", tanned, without wool on, 5,838 1% '720449 slag, scale and other waste of the production 7,121 2% whether ... of ... Boring or sinking machinery for boring earth Portland cement (excluding white, whether or '843049 or extracting minerals or ores, not self- 5,466 1% '252329 5,948 2% not artificially coloured) propelled ... Others 122,496 28% Others 75,103 23% Total 443,177 100% Total 327,180 100% Source：ITC TRADE MAP

 Mauritius In 2017, Pakistan's export to Mauritius account for 0.09% of the Pakistan’s total export whereas Pakistan’s import to Mauritius account for 0.1% of the Pakistan’s total import, and thus the value of trade between two countries is small. In July 2007, Pakistan signed a PTA with Mauritius and was put into operation in November 2007.

Table 5-8 Top10 products (HS6 digits）in Pakistan’s Trade with Mauritius Exports (2007) US$ thousand Exports （2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％ Semi-milled or wholly milled rice, whether or Semi-milled or wholly milled rice, whether or '100630 22,663 64% '100630 5,515 28% not polished or glazed not polished or glazed Single cotton yarn, of uncombed fibres, Single cotton yarn, of uncombed fibres, '520512 containing >= 85% cotton by weight and with 2,777 8% '520512 containing >= 85% cotton by weight and with 2,658 14% a linear ... a linear ... Multiple "folded" or cabled cotton yarn, of Single cotton yarn, of combed fibres, '520532 uncombed fibres, containing >= 85% cotton 1,277 4% '520522 containing >= 85% cotton by weight and with 1,673 9% by weight ... a linear ... Single cotton yarn, of uncombed fibres, Leather further prepared after tanning or '520511 containing >= 85% cotton by weight and with 880 2% '411310 crusting "incl. parchment-dressed leather", of 875 4% a linear ... goats ... Plain woven fabrics of cotton, containing Toilet linen and kitchen linen, of terry '521031 predominantly, but < 85% cotton by weight, 680 2% '630260 towelling or similar terry fabrics of cotton 868 4% mixed ... (excluding ... '190531 Sweet biscuits 478 1% '190531 Sweet biscuits 814 4% Woven fabrics of cotton, containing >= 85% Single cotton yarn containing predominantly, '520819 cotton by weight and weighing <= 200 g/m², 411 1% '520612 but < 85% cotton by weight, of uncombed 772 4% unbleached ... fibres ... Multiple "folded" or cabled cotton yarn, of Denim, containing >= 85% cotton by weight '520531 uncombed fibres, containing >= 85% cotton 409 1% '520942 and weighing > 200 g/m², made of yarn of 403 2% by weight ... different ... Single cotton yarn, of combed fibres, Fresh or dried wilkings and similar citrus '520522 containing >= 85% cotton by weight and with 349 1% '080529 323 2% hybrids a linear ... Plain woven fabrics of cotton, containing Medicaments containing antibiotics, put up '521051 predominantly, but < 85% cotton by weight, 305 1% '300420 in measured doses "incl. those in the form of 265 1% mixed ... transdermal ... Others 5,314 15% Others 5,294 27% Total 35,543 100% Total 19,460 100%

Imports (2007) US$ thousand Imports （2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％ Waste and scrap of iron or steel (excluding Vessels and other floating structures for 720449 slag, scale and other waste of the production 94 17% '890800 2,411 60% breaking up of ... Styrene-butadiene rubber "SBR"; Soap and organic surface-active products and '400219 carboxylated styrene-butadiene rubber 74 14% '340111 preparations, in the form of bars, cakes, 810 20% "XSBR", in primary forms ... moulded ... Cyclic amides, incl. cyclic carbamates, and '292429 their derivatives; salts thereof (excluding 52 10% '290513 Butan-1-ol "n-butyl alcohol" 218 5% ureines ... Propan-1-ol "propyl alcohol" and propan-2-ol '999999 Commodities not elsewhere specified 37 7% '290512 170 4% "isopropyl alcohol" Slag, dross, scalings and other waste from Butadiene rubber "BR", in primary forms or in '400220 36 7% '261900 the manufacture of iron or steel (excluding 118 3% plates, sheets or strip granulated ... Plain woven fabrics of cotton, containing Turnings, shavings, chips, milling waste, '521051 predominantly, but < 85% cotton by weight, 35 6% '720441 sawdust, filings, trimmings and stampings of 71 2% mixed ... iron ... Waste and scrap of tinned iron or steel Soap and organic surface-active products and '720430 (excluding radioactive, and waste and scrap 33 6% '340119 preparations, in the form of bars, cakes, 66 2% of batteries ... moulded ... Turnings, shavings, chips, milling waste, Recovered "waste and scrap" paper or '720441 sawdust, filings, trimmings and stampings of 29 5% '470790 paperboard, incl. unsorted waste and scrap 59 1% iron ... (excluding ... Waste and scrap of tinned iron or steel Isobutylene isoprene rubber "IIR", in primary '400231 28 5% '720430 (excluding radioactive, and waste and scrap 48 1% forms or in plates, sheets or strip of batteries ... Recovered "waste and scrap" paper or Waste and scrap of iron or steel (excluding '470790 paperboard, incl. unsorted waste and scrap 27 5% '720449 slag, scale and other waste of the production 20 0% (excluding ... of ... Others 95 18% Others 42 1% Total 540 100% Total 4,033 100% Source：ITC TRADE MAP

5-3-3 Possible Impact of FTA on Japanese and Pakistani Economies （１）Impacts on Japanese Economy As for the impact on FTAs by Japan, Pakistan's export items to Japan are mainly cotton yarn, cotton fabrics, garments and according to the questionnaire survey on Japanese companies as shown in chapter 4, there are some requests from textile companies to sign FTA whereas Pakistan’s textile industry has strong demands for FTAs. As shown in table 5-13, in terms of the top ten items, cotton yarn (HS 520512), cotton fabrics (HS 520812, HS 520912), and apparels (HS 620342, HS 620462) accounted for 13% of imports from Pakistan. In terms of non-textiles, ethyl alcohol (HS 227010) accounts for 35.3% of agricultural products exported to Japan in Pakistan, showing an increase of 5% per annum over the past five years. While imports to Pakistan have been on decreasing trend in the past five years from 2013 to 2017, major agricultural products show an increasing trend although the share of total import value remains small. Except for frozen fish meat (HS 030449), overall agricultural top 10 agricultural products at HS6 digits show an increasing trend as illustrated in Table 5-14.

Table 5-9 Japan’s Top10 Products (HS6 digits）in Trade with Pakistan Exports （2017） US$ thousand Imports （2017） US$ thousand HS Product Label Value ％ HS Product Label Value ％ Motor cars and other motor vehicles Undenatured ethyl alcohol, of actual alcoholic '870321 principally designed for the transport of 274,615 12% '220710 152,354 35% strength of >= 80% persons, incl. ... Light oils and preparations, of petroleum or Motor cars and other motor vehicles '870340 179,785 8% '271012 bituminous minerals which >= 90% by 67,054 16% principally designed for the transport of ... volume "incl. ... Single cotton yarn, of uncombed fibres, Flat-rolled products of iron or non-alloy steel, '720839 173,220 7% '520512 containing >= 85% cotton by weight and with 20,101 5% of a width of >= 600 mm, in coils, simply ... a linear ... Motor vehicles for the transport of goods, Waste and scrap, of copper (excluding ingots '870422 with compression-ignition internal 152,915 7% '740400 or other similar unwrought shapes, of 15,383 4% combustion piston ... remelted ... Parts suitable for use solely or principally Plain woven fabrics of cotton, containing >= '840991 with spark-ignition internal combustion 95,285 4% '520812 85% cotton by weight and weighing > 100 g to 13,483 3% piston ... 200 ... Gear boxes and parts thereof, for tractors, Men's or boys' trousers, bib and brace '870840 motor vehicles for the transport of ten or 87,756 4% '620342 overalls, breeches and shorts, of cotton 9,005 2% more ... (excluding ... Motor cars and other motor vehicles Copper, unrefined; copper anodes for '870324 principally designed for the transport of 74,813 3% '740200 8,808 2% electrolytic refining persons, incl. ... Motor cars and other motor vehicles Women's or girls' trousers, bib and brace '870323 principally designed for the transport of 62,556 3% '620462 overalls, breeches and shorts of cotton 8,347 2% persons, incl. ... (excluding ... Woven fabrics of cotton, containing >= 85% Flat-rolled products of iron or non-alloy steel, '720838 61,436 3% '520912 cotton by weight and weighing > 200 g/m², in 6,461 1% of a width of >= 600 mm, in coils, simply ... three-thread ... Motor vehicles for the transport of goods, Frozen shrimps and prawns, even smoked, '870423 with compression-ignition internal 54,869 2% '030617 whether in shell or not, incl. shrimps and 6,368 1% combustion piston ... prawns in ... Others 1,107,679 48% Others 124,600 29% Total 2,324,929 100% Total 431,964 100% Source：ITC TRADE MAP

Table 5-10 Japan’s Imports of Major Agricultural Products from Pakistan（HS6 digits）in 2017 (Japanese Report）

US$ thousand Share in Japan's Pakistan's Product CAGR HS Product Label Value Imports from Share in Japan's （2013-3017） Pakista Import from World Undenatured ethyl alcohol, of actual 1 220710 152,354 35.3% 33% 5% alcoholic strength of >= 80% Frozen shrimps and prawns, even 2 030617 smoked, whether in shell or not, incl. 6368 1.5% 0.4% 43% shrimps and prawns in . . . 3 050610 Ossein and bones treated with acid 4,952 1.1% 24% 77% Frozen fish meat n.e.s. (excluding 4 030499 3313 0.8% 1% -15% fillets) Sesamum seeds, whether or not 5 120740 2,974 0.7% 2% 9% broken Natural steatite, whether or not 6 252610 roughly trimmed or merely cut, by 2700 0.6% 8% 4% sawing or otherwise, into . . . Salts, incl. table salt and denatured 7 250100 salt, and pure sodium chloride, 2,556 0.6% 1% 26% whether or not in aqueous . . . Natural steatite and talc, crushed or 8 252620 1414 0.3% 2% 14% powdered 9 030389 Frozen fish, n.e.s. 743 0.2% 0.1% 6% Semi-milled or wholly milled rice, 10 100630 731 0.2% 0.04% 10% whether or not polished or glazed Total 431,964 100% - -4%

Source：ITC TRADE MAP

（２）Impacts on Pakistani Economy Pakistan's imports from Japan are mainly vehicles. 8 out of the top 10 items are vehicles, and the rest is excavators (HS 8429) and flat-rolled products (HS 720839). Top ten import items account for 57% of Pakistan's total imports from Japan. As Pakistan’s high economic growth stimulates the demand for vehicles, the growth rate of different type of vehicles far exceeds the average growth rate of imports of 4%. Products imported from Japan are mainly auto-parts, medical equipment, and precision instruments or capital goods to support Pakistan’s textile and automotive industries. Imported items vary; for example, imported items below 11th include parts used for engines (HS840991) for US$ 32 million, long fibers of recycled fibers and semisynthetic fibers (HS550200）for US$ 28 million, looms （HS844630）for US$ 22 million, measuring instrument（HS901580）for US$ 12 million, X ray equipment/tomography equipment（HS902214）and others.

Table 5-11 Pakistan’s Top 10 products （HS6 digits）imported from in 2017 (Japanese Report）

Imports （2017） US$ thousand CAGR HS Product Label Value ％（2013-3017） Motor cars and other motor vehicles '870321 principally designed for the transport of 385,105 17% 19 persons, incl. ... Flat-rolled products of iron or non-alloy steel, '720839 221,928 10% 26 of a width of >= 600 mm, in coils, simply ... Motor cars and other motor vehicles '870322 principally designed for the transport of 179,303 8% 17 persons, incl. ... Motor cars and other motor vehicles '870323 principally designed for the transport of 143,182 6% 19 persons, incl. ... Motor vehicles for the transport of goods, '870422 with compression-ignition internal 98,347 4% 59 combustion piston ... '870120 Road tractors for semi-trailers 90,988 4% 62 Motor cars and other vehicles principally '870390 designed for the transport of persons, incl. 47,345 2% 69 station ... Motor vehicles for the transport of >= 10 '870210 persons, incl. driver, with compression- 45,564 2% 22 ignition ... Self-propelled mechanical shovels, '842959 excavators and shovel loaders (excluding 44,895 2% 87 self-propelled ... Motor cars and other motor vehicles '870324 principally designed for the transport of 42,693 2% 13 persons, incl. ... Others 994,601 43% - Total 2,293,951 100% 4

Source：ITC TRADE MAP