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UNCLAS SECTION 01 OF 04 ISLAMABAD 000332 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PRELPK
SUBJ: U.S.-PAKISTAN FREE TRADE AGREEMENT:  A POTENTIAL GAME CHANGER 
 
¶1.  (SBU) Summary and Introduction: President Zardari, Prime 
Minister Gilani and Finance Minister Tarin, like many Pakistanis 
before them, have pleaded with the USG for "trade, not aid." A Free 
Trade Agreement (FTA) with Pakistan holds substantial opportunity 
for the Pakistani economy, with small, but positive, implications 
for the U.S. economy.  However, the economic benefits of any 
potential FTA depend on the inclusion of Pakistan's primary export: 
textile goods, primarily in cotton. 
¶2.  (SBU) Our initial research conducted by Deloitte indicates that 
an FTA that includes textiles would result in over 1.4 million new 
jobs in Pakistan, including in impoverished regions of Southern 
Punjab and Northern Sindh where militant recruitment is high. It 
would double Pakistani exports to the United States, but would have 
little to no impact on total U.S imports.  Increased textile imports 
from Pakistan would merely supplant imports from other countries. 
Based upon recent experiences of other countries having bilateral 
trade agreements with the United States, the multiplier effects in 
terms of employment, investment, and innovation in Pakistan would 
spur rapid growth across the country. Foreign direct investment 
(FDI) could potentially double and Pakistan's GDP growth would be 
bumped up by 1.5 percent each year. 
¶3.  (SBU) An FTA would also serve our broader interests in the 
region.  A U.S.-Pakistan FTA would encourage other countries in 
South Asia, including possibly India, to engage with Pakistan on 
trade and investment matters to benefit from Pakistan's access to 
the U.S. market.  It would also encourage Pakistan to conclude the 
Afghanistan Pakistan Transit Trade Agreement. 
¶4.  (SBU) Embassy recommends Washington agencies analyze the 
potential benefits of a free trade area with Pakistan.  We are 
mindful of the U.S. domestic constraints, the pending free trade 
areas with other countries, and the lack of trade promotion 
authority.  But given Pakistan's enormous national security 
importance to the United States - and Pakistan's role in our 
eventual success in Afghanistan - we believe an FTA with Pakistan is 
worthy of serious consideration.  The FTA would reduce the burden on 
our own foreign assistance budget (currently $3.5 billion a year) 
and improve the U.S. image in Pakistan.  The Reconstruction 
Opportunity Zones (ROZs) have languished in Congress for almost 
three years and have always had serious limitations in product and 
geographic coverage.  We believe it is time to move to something 
more far-reaching and sustainable.  End summary and introduction. 
Pakistan's Current Trade with the United States 
--------------------------------------------- -- 
 
¶5.  (SBU) The United States is Pakistan's top export market, 
accounting for approximately 18.8 percent of Pakistan's total 
exports in FY 2008-2009.  Pakistan's exports to the U.S. reached 
$3.6 billion in 2008-2009, with textiles representing 84 percent of 
that total.  Exports to the United States are primarily in 
cotton-based textiles (home textiles and apparel including knit 
shirts, denim trousers and socks) which account for over 90 percent 
of Pakistan's textile exports. Tariff levels applied by the United 
States to these top 61 export items range to as high as 23.5 
percent. 
 
¶6.  (SBU) The top ten U.S. imports from Pakistan for 2008 (value and 
applied tariff rate in parenthesis) are: 1) Cotton terry towels, 
excluding dish towels ($282 million, 9.1 percent); 2) Cotton sheets, 
printed ($207 million, 6.7 percent); 3) Men's and boy's cotton knit 
shirts ($160 million, 19.7 percent); 4) Men's or boys' cotton socks 
($138 million, 13.5 percent); 5) Men's and boy's cotton pullovers 
($126 million, 16.5 percent); 6) Cotton terry towels, including dish 
towels ($115 million, 9.1 percent); 7) Cotton sheets, not printed 
($109 million, 6.7 percent); 8) Men's cotton denim trousers ($63 
million, 16.6 percent); 9) Men's and boy's cotton overcoat ($74 
million, 15.9 percent) and 10) Cotton bed linen knit or crocheted 
($64 million, 6 percent). All the products are cotton-based. 
¶7.  (SBU) Other products that could benefit from an FTA include 
leather, surgical tools, carpets, gems and jewellery, sporting 
goods, cutlery and marble. Some of these goods are currently 
benefiting from zero tariffs as part of the U.S. General System of 
Preference (GSP) initiative, which will expire on December 31, 
¶2010. 
Other U.S. FTAs and Their Impact 
-------------------------------- 
 
ISLAMABAD 00000332  002 OF 004 
 
 
 
¶8.  (SBU) Currently, the United States has 9 bilateral Free Trade 
Agreements (FTA) with Australia, Bahrain, Chile, Israel, Jordan, 
Morocco, Oman, Peru, Singapore, and two multilateral agreements: the 
Central America-Dominican Republic-United States Free Trade 
Agreement (CAFTA-DR) with Costa Rica, Dominican Republic, El 
Salvador, Guatemala, Honduras, Nicaragua; and the North American 
Free Trade Agreement (NAFTA) with Canada and Mexico. FTAs with 
Colombia, Korea and Panama are pending. 
¶9.  (SBU) Examples of FTAs in the Middle East that include U.S. 
concessions on textile tariffs provide a model for an FTA with 
Pakistan. In the cases of Jordan, Bahrain, and Oman, the FTAs 
provide duty free or preferential treatment to more than 90 percent 
of traded products including textiles and garments. A year after the 
signing of its FTA in 2006, Bahrain's textile exports to the United 
States increased by 19.1 percent. 
¶10.  (SBU) Apart from these FTAs, the Qualifying Industrial Zone 
(QIZ) program is operating in Jordan (1998) and Egypt (2004). Since 
its establishment, the Qualifying Industrial Zones program has 
fostered over 800 firms in 21 Qualifying Industrial Zones, employing 
over 115,000 workers and exporting over $2.25 billion, including 
more than $1.25 billion in garments to the United States at the 
program's peak in 2007. 
¶11.  (SBU) The FTA and Qualifying Industrial Zones programs in 
Jordan bolstered reform efforts in other parts of the economy.  FTA 
negotiations with Jordan provided the negotiating space and economic 
incentives that aligned Jordan's environmental regulation, 
intellectual property rights enforcement, and labor and work-permit 
requirements with international standards.  In essence, the 
negotiations transformed the role of Jordan's government from that 
of an economic "manager" to a "regulator," a key to modernizing its 
economy.   Such liberalization brought substantial levels of foreign 
direct investment.  Jordan's foreign and domestic investment 
increased by 79 percent after signing the FTA. 
The Potential Impact on Pakistan's Economy 
------------------------------------------ 
 
¶12.  (SBU) Our research from Deloitte indicates that a U.S.-Pakistan 
FTA eliminating tariffs on textiles would more than double Pakistani 
exports to the United States from $3.6 to $6.5 billion.  For this 
increased trade, the textile sector would build extra capacity and 
employ more workers, creating 1.4 million direct/indirect jobs in 
the textile sector.  The spike in employment would have a ripple 
effect in other related sectors from cotton-growing farmers to the 
entire logistics chain leading to the exports of textiles.  Southern 
Punjab and Northern Sindh, cotton-producing regions where poverty 
drives extremist recruitment, stand to benefit most from the textile 
export boost. 
 
¶13. (SBU) According to Deloitte trade mapping, within two years of 
signing an FTA, bilateral trade between the United States and 
Pakistan would increase by at least 80 percent, with Pakistani 
imports from the U.S. growing nearly as rapidly as exports. The 
trade would bump up Pakistan's annual GDP growth by 1.5 percent. 
Moreover, industrial investment and economies of scale will boost 
Pakistan's overall trade with the world by 35 percent. 
¶14. (SBU) Deloitte's preliminary investment flow analysis points to 
a U.S.-Pakistan trade agreement potentially doubling foreign direct 
investment in Pakistan.  Such foreign direct investment would shift 
Pakistan's comparative advantage to a more diverse set of products 
both within the textile sector and beyond textiles.  Foreign direct 
investment brings with it hard capital, managerial know-how, 
cutting-edge technology, and market savvy.  Specifically, market 
access to and foreign direct investment from the United States would 
create opportunities for vertical integration between U.S. and 
Pakistani firms and enhance Pakistan's capabilities in new 
technologies, research and design. 
¶15.  (SBU) Moreover, an FTA would keep Pakistani capital in 
Pakistan.  A number of Pakistani textile firms have moved production 
to Egypt, Jordan, Madagascar and Bangladesh to take advantage of 
lower U.S. tariffs.  An FTA would reverse that trend. 
¶16.  (SBU) The negotiating process and the economic incentives from 
a U.S.-Pakistan FTA would forge a stronger economic and strategic 
partnership, anchoring Pakistan's existing economic reform 
commitments, and demanding further regulatory and institutional 
reform.  The FTA would put rules and economic incentives in place 
 
ISLAMABAD 00000332  003 OF 004 
 
 
that would strengthen Pakistan's export-oriented, market economy at 
the expense of rent-seeking economic behavior.  This change should 
encourage job growth, promote investment, and erode the oligopolies 
that currently dominate a number of key economic sectors. 
¶17.  (SBU) A U.S.-Pakistan FTA could well have a regional economic 
and political impact.  Pakistan's negotiations with Sri Lanka on a 
bilateral trade agreement have recently come to a halt.  India has 
signed bilateral FTAs with Sri Lanka and Bangladesh, isolating 
Pakistan within the SAARC's regional bloc.   A U.S. - Pakistan FTA 
will encourage other South Asian countries to sign trade and 
investment agreements with Pakistan to benefit from Pakistan's 
access to the U.S. market.  It could potentially open up business 
avenues between Pakistan and India, promoting improved relations 
between the two countries.  Additionally, the USG could use the 
carrot of the FTA to push for the signing of the Afghanistan 
Pakistan Transit Trade Agreement (APTTA). 
Impact of an FTA on the United States 
------------------------------------- 
 
¶18.  (SBU) While the U.S. is Pakistan's largest export market at 
18.8 percent, these goods represent only 0.21 percent of U.S. 
imports.  An FTA will benefit both countries, but the relative sizes 
of the two economies translate into a much bigger gain for Pakistan. 
 Nevertheless, U.S. exports to Pakistan stand to grow by over 80 
percent. 
 
¶19.  (SBU) Historically, free trade agreements have increased U.S. 
economic growth and employment, while perhaps counter-intuitively, 
narrowing the U.S. trade deficit.  In 2007, 16 percent of the 
overall U.S. trade deficit resulted from trade with FTA trading 
partners, compared to 84 percent attributed to trade with non-FTA 
trading partners.  In 2008, this trend continued with total U.S. 
exports to partners growing by 8.5 percent, while imports grew by 
only 6 percent.  The United States has enjoyed stronger economic 
growth, higher manufacturing output, and lower unemployment because 
of these trade agreements. 
 
¶20.  (SBU) U.S. growers of grain and cotton and producers of 
processed foods, chemicals, machinery and equipment (electrical and 
mechanical) will gain most from free trade access to the Pakistani 
market.  The top 10 Pakistani imports in 2008 from the U.S. (with ad 
valorem tariff applied by Pakistan in parenthesis) in 2008 were 1) 
Aircrafts and parts (5 percent);2)Cotton (0 percent); 3) Wheat (10 
percent); 4) Electric appliances (12.2 percent); 5) Ferrous waste 
and scrap (8 percent); 6) Air vacuum pumps (11.8 percent), 7) 
Moving/boring/scraping machinery of earth (5 percent); 8) Turbo jets 
and propellers, and gas turbines (5 percent)and 9) Machinery parts 
(5 percent); 10) Automatic data processing machines(0 percent). 
 
¶21.  (SBU) The relaxation of U.S. textile tariffs will have little 
effect on the U.S. textile industry.  In 2008, Pakistan ranked 
seventh among textile exporters to the United States at $3.2 
billion.  That same year, the top exporters (with their share in 
parenthesis) of textile products to the United States were China (33 
percent), India (5.7 percent), Mexico (5.5 percent), Vietnam (5.5 
percent), Indonesia (4.5 percent), Bangladesh (3.7 percent) and 
Pakistan (3.2 percent).  An FTA would potentially double Pakistan's 
share of such imports to 6 percent.  Rather than increasing total 
U.S. textile imports, Pakistan's marginal increase would take market 
share from the top exporting countries.  China and Bangladesh would 
lose the most market share, as much of their cotton and other 
textile inputs are currently imported from Pakistan.  We believe 
Mexico would be least affected due to its geographic proximity to 
the United States and NAFTA. 
 
¶22.  (SBU) The highly automated and innovative segments of the U.S. 
textile industry, such as design, industrial fabrics, carpets, 
specialty yarns and textile machinery will see their exports grow 
and benefit from open textile trade.  However, employment in the 
U.S.-based textile industry overall is expected to decline by 48 
percent by 2018. The decline is primarily due to the move to more 
capital-intensive manufacturing.  An FTA with Pakistan would have no 
discernible impact on this trend. 
 
¶23.  (SBU) Comment:  Pakistani interlocutors - from President 
Zardari to Finance Minister Tarin - have pushed the case for U.S. 
 
ISLAMABAD 00000332  004 OF 004 
 
 
"trade, not aid."  The announcement of our intention to negotiate an 
FTA would generate political capital.  It would belie the common 
Pakistani perception that the United States is not committed to a 
robust, long-term relationship with Pakistan.  The FTA would create 
jobs and economic growth in many of the regions where militants 
currently recruit unemployed young men.  It would align Pakistan's 
economic regulatory structure with ours and orient Pakistan's 
economy to the outside world.  And it would do so while bolstering 
the U.S. economy, providing U.S. exporters a leg up in the Pakistani 
market.  For us to realize these political and economic gains, free 
trade in textiles is a must: the economic significance of their 
inclusion is negligible to the United States, but key for Pakistan. 
 
 
¶24.  (SBU) We are mindful of the U.S. domestic restraints to an FTA. 
 The Reconstruction Opportunity Zones (ROZs) have languished in 
Congress for almost three years and still have serious limitations 
in product and geographic coverage.  An FTA is ambitious, but given 
Pakistan's enormous national security importance to the United 
States as well as to our prospects for success in Afghanistan, it 
merits serious consideration.  End Comment. 
 
 
Patterson