Quetta, Pakistan - Under the free-trade agreement (FTA) signed last Friday between Pakistan and China, the two countries will implement the first phase of customs duty reduction from next July 1.

A five-year tariff deal is expected to provide a level playing field for Chinese firms investing in various sectors in Pakistan, and the two countries have agreed to increase bilateral trade to US$ 8 billion by 2008.

China has rapidly increased its stake in Pakistan in recent years, and the country's Indian Ocean port of Gwadar provides Beijing with a strategic base, allowing it to extend its sphere of influence to the Middle East and Central Asia.

During the past four years, investment from China has continuously risen in different sectors of the Pakistani economy. More than three dozen Chinese companies are operating in the oil-and-gas, information-technology, telecommunications, power-generation, engineering, automobile-manufacturing, infrastructure and mining sectors. In Karachi, as many as 30 Chinese companies and about 400 Chinese engineers are participating in various projects.

Scores of formal agreements have increased the total trade volume between Pakistan and China from less than $1 billion in 2000-01 to about $5 billion by the end of 2006.

Beijing believes there is vast potential for Chinese companies to invest in various sectors of Pakistan's economy. During a visit to China by Pakistani Prime Minister Shaukat Aziz in 2004, Islamabad announced "free market economy" status for China, and Beijing pledged to provide $150 million for Chashma Nuclear Power Plant (Phase II).

Under the FTA signed last week, Pakistan will gain access to the vast Chinese market, while China will sell Pakistan more and more goods, as well as get cheap raw materials and the use of Pakistani ports for the onward export of its goods to world destinations at reduced freight rates.

The biggest chunk of Chinese investment in Pakistan is being spent on development projects in the country's largest province, strategically located Balochistan. The most important projects being launched with Chinese assistance in Pakistan include construction of the Gwadar deepsea port in Mekran, the Saindak copper and gold project in Chaghm, and the lead-zinc-mining project in Balochistan's Lasbela district.

The Chinese have invested about $230 million in the Gwadar port and the Saindak copper project, which is more than 50% of their total investment in the country.

At present, Chinese firms and engineers are helping develop key sectors of the Balochistan economy, including infrastructure, mining, and oil and gas exploration. Chinese companies working in Balochistan include Tianjin Zhongbei Harbor Engineering Supervision Corporation of China, China Harbor Engineering Company Group (CHECG), Metallurgical Construction Corp and its subsidiary MRDL, and the Bureau of Geophysical Prospecting. Some security analysts believe that the real motive behind China's provision of technical assistance, personnel and funding for the construction of the Gwadar port is that it wants to turn it into a transit terminal for Iranian and African crude-oil imports.

As a long-term strategic asset, the port could provide access for its navy to patrol Indian Ocean sea lanes, as well as an alternative land-based route for crude-oil imports.

The Chinese stake in Gwadar has been growing since construction of the seaport began in March 2002. The total cost of the project is estimated at $1.6 billion. China has so far contributed about $198 million and Pakistan has allocated $50 million.

China has also spent $200 million building a coastal highway connecting Gwadar port with Karachi.

The first phase has been completed by the CHECG. During Pakistani Prime Minister Shaukat Aziz's China visit in December 2004, an agreement with Beijing was signed for the dredging of the Gwadar port channel up to a depth of 14.7 meters, allowing big vessels access to the port.

A proposal for the establishment of Gwadar Economic and Energy Zone (GEEZ) is being considered. The proposed zone will comprise an oil refinery, liquefied-natural-gas terminals and petrochemical sites. The two countries will set up a joint-venture consortium to finalize the preferential policy and tax-incentives package for the establishment of GEEZ.

China has also expressed interest in constructing an oil refinery in Gwadar. As Pakistan's biggest, it would refine 60,000 barrels per day. A feasibility study is being considered by Islamabad and Beijing for an oil pipeline from Gwadar port to western China to transport China's oil imports from the Persian Gulf rapidly. During his last visit to China in February, Pakistani President General Pervez Musharraf offered a "trade corridor" to meet Beijing's energy requirements. Pakistan would help China with the construction of the strategic pipeline from Gwadar to its borders, enabling it to import oil from Saudi Arabia.

On the security front, the Chinese have paid heavily for investing in Balochistan. A military operation is being undertaken to quell a rebellion by Baloch militants in the province. In May 2004, three Chinese engineers lost their lives in an act of terrorism in Gwadar. In the first quarter of this year, two Chinese engineers were killed in an act of terrorism in the Hub area of Balochistan.

Some experts believe that the FTA is unlikely to increase bilateral trade volume to $15 billion, as Pakistan still needs to do a lot to improve internal security, promote its exports and encourage its business community to invest in China.

Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based development analyst in Pakistan. He is the author of six books, including The Economic Development of Balochistan, published in May 2004.