Dr. Fawad Kaiser
If you want your country to have a great economy, it has got to produce wealth. And one of the primary ways to produce wealth is to manufacture different products. But we decided to start shipping in cheaper products from overseas. At first it didn’t create too much of a problem for our massive economy, but eventually the floodgates opened up and we lost tens of thousands of manufacturing facilities and millions upon millions of good paying jobs.
Our labour pool was merged with the labour pool of countries such as China where it is legal to pay cheap labour wages to manufacturing workers. Needless to say, our manufacturers could not compete with that and our middle class started to shrink rapidly.
By using changes in Chinese imports by other low income countries we can analyze the effect of rising Chinese import competition between 1990 and 2014 on 
Pakistan local labour markets by exploiting cross- market variation in import exposure stemming from initial differences in industry specialization and instrumenting for Pakistan imports. Rising imports cause higher unemployment, lower labour force participation, and reduced wages in local labour markets that house import-competing manufacturing industries.
Over the recent years, in our main specification, import competition explains three quarter of the contemporaneous aggregate decline in Pakistan manufacturing employment. Consequently, while we try to negotiate with this issue, unemployment and price variation in markets also rise sharply in more trade-exposed labour markets.
Chinese industry is gaining access to long banned foreign technologies, capital goods, and intermediate inputs and multinational enterprises and is being permitted to operate in Pakistan. Credit to China, the positive effect of internal reforms on China’s trade has given them accession to the WTO, which gives it most-favoured nation status among the 153 WTO members. While most observed trade flows into Pakistan are the result of both supply and demand factors, the growth of Chinese exports is largely the result of reform-induced changes within China.
Economic analysis finds that exposure to Chinese import competition affects local labour markets not just through manufacturing employment, which unsurprisingly is adversely affected, but also along numerous other margins. Import shocks trigger a decline in wages that is primarily observed outside of the manufacturing sector. Reductions in both employment and wage levels lead to a steep drop in the average earnings of households.
Rising imports of Chinese goods have had significant negative effects on Pakistan labor markets exposed to increased import competition. These include decreased 
employment and household incomes. The growing relationship between Pakistan and China is contributing to changes in the structure of the Pakistan economy but this has implications for the growth and composition of manufacturing output and employment. These effects are complex and differentiated. Chinese competition has had a significant impact on Pakistan manufacturing in the period since China joined the WTO. Over the past decade, the bulk of the increase in import penetration of the Pakistan market can be attributed to Chinese imports. It is now the largest source of imports to Pakistan both in aggregate and in 17 out of 34 manufacturing industries. Its share of the domestic market has increased steadily over the period from less than ½% in 1995 to around 9% in 2014.
The uneven nature of import penetration means that some industries face very significant competition from China. Although increased imports from China have partly replaced imports from other countries, it appears that most of the increase in Chinese penetration of the market has been at the expense of local production.
Pakistan has lost market share to China in its major export markets. This suggests that the overall impact of Chinese competition on manufacturing employment in Pakistan has been negative. First there was the loss of jobs associated with the displacement of local production by imported goods and the fact that labour intensive industries were particularly badly affected by Chinese imports meant that the negative impact on employment was more than proportional to the output displacement.
The econometric analysis also showed that, even controlling for changes in output, increases in Chinese import penetration tended to reduce employment at the industry level. A number of different factors could explain this. First the exit of the least productive firms would tend to increase the overall level of productivity in the industry. Second surviving firms may respond to increased competition through defensive innovation which raises productivity and/or moving out of the most labour/intensive segments of an industry. In the absence of firm level data and more disaggregated industrial sectors, it is impossible to say which of these effects have affected employment in Pakistan, but all three may have played a part.
Chinese imports also reflect shifts in aggregate demand within Pakistan. Hence they are an outcome of consumption, production and investment decisions elsewhere in the economy. We need therefore to be wary of assuming changes in Chinese import values as a consequence of exogenous effects, rather than endogenous outcomes of domestic influences.
Similarly, we have not fully addressed the possible positive effects on domestic 
production of cheaper access to capital and intermediate inputs which now dominate imports from China. Increases in output arising from cheaper intermediate inputs and capital would be expected to increase employment, but these gains may be offset by the substitution of cheaper capital for labour or the outsourcing of intermediate input production within each firm. These relationships though would require further investigation.
Thirdly, we have only addressed the impact of Chinese competition on the manufacturing sector and manufacturing employment and have not attempted to draw conclusions at the macro level which would involve considering the impacts on the primary and tertiary sectors as well. As far as services are concerned, imports of low priced electronic items from China, for example, stimulated demand and employment within the retail sector. The losses in employment within electronic market were therefore partly offset by increased employment in the retail sector. This focus on manufacturing is justified by the key role that is seen by policy makers in Pakistan for the industrial sector in bringing about a more dynamic economy in Pakistan, and the need to achieve more rapid economic growth in order to tackle the country’s serious employment problem.
Another interesting issue with measuring trade exposure is that imports from China include both final goods purchased by Pakistan consumers and intermediate inputs purchased by Pakistan firms. If trade with China increases the variety of inputs to which Pakistan producers have access, it may raise their productivity, increasing their demand for labour and partially offsetting the impact of import competition in final goods.
China is often the final link in the supply chain owing to its comparative advantage in labour-intensive assembly, which tends to be the last stage of production, 
meaning that goods leaving China tend to be on their way to consumers. China’s place in global production suggests that although we do not explicitly account for supply chains, our approach still captures how imports from China affect the demand for Pakistan goods.
The big impact on us is that China’s economy is maturing. “A powerful China has been coming, and we have two choices. Either we’re at the table, or we’re on the menu,” China is not the enemy. Good news from China is good news for Pakistan. Bad news from the Chinese economy is bad news here.
The rise of China presents a dramatic opportunity for Pakistan, especially if it can shift to an export-driven economy. Over the next decade, the world is going to have billions more people entering the middle class and the smart companies are already starting to cater to that market.
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