THE CHINA-PAKISTAN ECONOMIC CORRIDOR: REGIONAL EFFECTS AND RECOMMENDATIONS FOR SUSTAINABLE DEVELOPMENT AND TRADE.

• Jurisdiction: United States
• Date: 22 June 2017
• Author: Lakhani, Shirin

In November 2003, China and Pakistan signed a Joint Declaration of Cooperation outlining their bilateral intent to promote trade and economic development. (1) In 2006, these nations composed and signed the Pakistan-China Free Trade Agreement (FTA) according to World Trade Organization (WTO) guidelines. (2) It was not until April 2015, when Chinese President Xi Jinping visited Pakistan, that the fruits of these agreements came to blossom. During this visit, China and Pakistan signed 51 agreements, memorandums of understanding (MoUs), and financing contracts, signaling the beginning of what is now known as the ChinaPakistan Economic Corridor (CPEC). (3)

CPEC is a $51 billion Chinese investment to develop Pakistan's infrastructure, transportation, and energy sectors. (4) Approximately 80% of the projects are energyrelated, with the remaining 20% dedicated to expanding existing infrastructure. (5) The Corridor will link Kashgar to Gwadar, providing China with a direct route to the Persian Gulf. CPEC will reduce almost 13,000 km and forty-five days to ship goods to just 2,000 km and ten days (See Figure 1). (6) In addition, secure energy sources, well-developed trade routes, and increased appeal to investors will bolster Pakistani textiles, agriculture, tourism, and manufacturing industries.

The potential for this investment to have a net positive impact on both China and Pakistan is great, however, CPEC is not without its problems. Security concerns, corruption, regional turmoil, and social and environmental impacts signal that there is ample work to be done. The most effective way to mitigate these risks is through an investment approach framed within the lens of long-term social, economic, and environmental sustainability. This Article aims to provide such a lens.

This Article is divided into two sections. The first section describes China's One Belt, One Road initiative and how CPEC fits into it. This section also includes an overview of the various CPEC projects and the bilateral agreements that govern the investment. The second section of this Article identifies key issues and roadblocks for CPEC. Recommendations on how to overcome these hurdles are divided into three categories: security, regional turmoil, and improved data analytics.

1. ONE BELT, ONE ROAD

   Understanding the importance of CPEC requires a brief overview of China's larger One Belt, One Road (OBOR) initiative, perhaps best described as a modernday Silk Road. OBOR is a network of pipelines, railways, roads, and maritime trade routes spanning across Asia, Africa, and Europe (See Figure 2). (7) At the heart of OBOR is CPEC, with the entire system's crown jewel resting in Gwadar. The project is often seen as China's response to the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). (8) Neither of these global trade agreements includes China. The TPP is a partnership between the countries of North America and the Pacific Rim. (9) Twelve countries in total compose the agreement, notably including China's closest neighbors, but not the red giant itself. (10) The TTIP is a more western-focused agreement between the United States (US) and the European Union." The TTIP is still undergoing negotiation, but the TPP utterly failed on US President Donald Trump's first day in office. (12) In contrast, both OBOR and CPEC are well underway. Only time will tell, however, if CPEC and OBOR are China's attempts to surpass the US as the world's superpower. What is certain in the interim is the magnitude of economic benefit that awaits both Pakistan and China at the end of their joint Corridor.

   1. Infrastructure, Transportation, and Energy

      CPEC is expected to add over 700,000 jobs to the Pakistani labor market and increase the country's GDP by 2.5 percentage points from 2015 to 2030, all through a vast array of infrastructure, transportation, and energy projects. (13) By March 2018, 14 of the 21 energy projects are estimated to produce 10,400 megawatts (MW) of energy. (14) The projects include investments in both traditional and alternative energy sources, including solar, wind, coal, and hydropower. The infrastructure projects will expand on Pakistan's existing roadways to create a 1,100 km motorway between Lahore and Karachi; update the Karakorum Highway connecting Rawalpindi to China; upgrade the Karachi-Peshawar railway to handle a train running at 160 km/ h; and extend a railway network to connect Pakistan to the Xinjiang Railway in Kashgar (See Figure 3). (15) CPEC will also encompass a network of oil and natural gas pipelines, including one connecting Gwadar to Nawabshah in Iran. (16)

      Gwadar is the connecting point for a substantial portion of CPEC activities. Its strategic prowess rests on its advantage as one of the world's largest deep-water ports, connecting South Asia, Central Asia, and the Middle East, and housing almost two-thirds of the world's oil reserves. (17) The port's location at the mouth of the Persian Gulf makes it a prudent gateway for the first set of CPEC projects. Development projects should make Gwadar Port fully operational by the end of 2017. The remaining projects are expected to be operational by 2020. (18)

      The Nation, a Pakistani news outlet, published a list of the 51 MoUs signed by Pakistan and China in April 2015. (19) However, due to the lack of publicly available documentation for each agreement, this paper only provides contract titles. The actual financial structures of the various projects remain elusive. What we can discern is that most, if not all, of the energy-related projects are structured as public-private partnerships (P3s), with the government of Pakistan purchasing energy from private Chinese corporations funded by Chinese banks. (20) Access to power purchase agreements is limited, so it is difficult to ascertain the cost of each type of energy source. One particular power project between Sino-Sindh Resources and the Industrial and Commercial Bank of China is financed through a 75% debt, 25% equity deal. (21) If one extrapolates this deal as a standard financing structure for other energy projects, which compose approximately 80% of the CPEC initiatives, one can estimate that 60% of CPEC will be funded through loans, and 40% through equity. Sinosure, a Chinese insurance corporation, will insure all of the loans. And the interest rates, in addition to Sinosure's 7% service fees, are no paltry sum. (22) China can expect to reap an estimated 27% return on investment from most CPEC projects. (23)

      This debt burden creates a huge problem for Pakistan. While its banking sector is growing, the upfront capital costs of CPEC will likely make finding adequate local financing a significant challenge. However, the...