India – Pakistan Trade: Recent Developments, Future Prospects and Risks

Print Friendly

By

Ishrat Husain[1]

Abstract

(The future growth, disruption or slow death of India-Pakistan Trade will depend on whether a proactive, sensible system is put in place to manage the relations. It is in the mutual interest of the two countries to strive for an enduring uninterruptible long term relationship that is not prone to sudden disruptions, abrupt retaliations and knee jerk reactions. – Author)

Economic historians and analysts have been faced with a conundrum for quite some time. They found it hard to comprehend that South Asia, which was a single large market  until a few decades ago with goods, services, capital investment and skilled labor flowing freely  and the newly independent  countries inheriting a common historical, legal, cultural and administrative background and a very well linked  infrastructure was the least integrated region in the world while East Asia with countries having such diverse background and very little in common historically had become the most integrated region  second after the European Union. Moreover, there was almost a consensus among academic economists in both the countries that the normalization of trade relations would bring substantial economic benefits evenly. Among many reasons responsible for this puzzle, the political tension and rivalry between the two major countries of the region – India and Pakistan – stands out as the main explanatory variable.

[1]

Recently, there have been some healthy developments in relaxing this constraint and resuming better trading relations. Academic consensus has now spilled over to the business community and a majority of the businessmen on two sides of the border appear convinced that liberalization of bilateral trade would be in their mutual interest. Finally, the policy makers, for a variety of internal and exogenous circumstances, seem to have overcome their reservations and a momentum has been built up in the last several months to move the process forward.

The breakthrough came in the form of Pakistan’s decision to grant Most Favored Nation (MFN) status to India and moving away from a highly restrictive positive list of items that could be imported from India to a negative list. The negative list will also be phased out by December 2012 and there will be no restriction on tradable items. Out of 8,000 items only 15 percent or 1209 items are placed in the negative list. The remaining 6,800 can now be imported from India, while the previous positive list had only 2,000 items. This is a significant change whereby 85 percent of tradable goods can be procured from India compared to 25 percent previously. The South Asia Preferential Trade Agreement (SAPTA) which both India and Pakistan has signed will gradually phase out all tariffs on traded goods with zero tariffs by 2016.

The sector-wise details of negative list are given in Annex – I. Fifty percent of the goods on the negative list belong to Automobile, Iron and Steel, and Paper and Board Industries which were relatively more vociferous in their opposition to the movement from the positive to negative list.

India and Pakistan have also recently signed agreements addressing three key issues that have long plagued business in the region: standards and testing, custom clearance and dispute resolution.  A few months ago India removed the restrictions on Indians investing in Pakistan and vice versa. In April, an integrated Border Post check between Attari and Wagah was inaugurated with modern facilities that will allow many more trucks to cross the border daily. India has reduced the number of items that are prohibited for import from Pakistan by 30 percent.  The President of Pakistan ratified a liberalised visa agreement that will allow for ease in travel of businessmen between both nations

Over the last decade, India and Pakistan, the two largest economies of South Asia, have succeeded in more than doubling their per capita income. Both economies have also managed to sustain a growth trajectory. The Confederation of Indian Industry noted in their 2011 report that both nations implemented significant economic reforms that have opened up their economies and brought about rapid growth, more than doubling the size of each economy in the last 10 years.  Yet, according to a study conducted by Pradeep Mehta for the Pakistan Institute of Legislative Development And Transparency (PILDAT) earlier this year, intra-regional trade hovers at a paltry 5% of the total trade between all countries of South Asia. By choosing to take the lead in liberalizing their import regimes, India and Pakistan could set an example for other countries in South Asia to follow. Unofficial trade between India and Pakistan are estimated at approximately US$ 2.0 billion per year.  This does not include trade via Dubai in which the products’ port of origin is often relabeled.  Better trade relations between the two countries can directly improve the economic and political environment of the whole South Asian region.

Major political parties and other influential stakeholders have realized that Pakistani economy is lagging behind other countries and Pakistan has not taken advantage of its strategic location between two most populous and high performance economies i.e. China and India. With the signing of the Free Trade agreement with China, Pakistani markets and producers have already adjusted to relatively cheaper imports from China. They no longer consider the threat of Indian products flooding Pakistani markets and displacing domestic industries carrying much substance. In some areas such as fashion wear, bed wear, home textiles, cement etc. Pakistan would be able to do much better and penetrate a much larger market. The overwhelming support from Pakistani Businessmen for MFN status to India is partly a reflection of this sense of confidence. Traders and importers in Pakistan are anticipating much larger business volumes and thus profits for themselves from this opening up. Trade liberalization will unambiguously benefit Pakistani consumers since product prices should fall and consumer choice expand when trade barriers are reduced or removed. Increased trade flow that stems from the lifting of import prohibition for items coming from India would lead to additional customs revenue for Pakistan.

The overwhelming evidence of the advantages of bilateral trade liberalization has tilted the balance in favor of the proponents of increased trade with India. But there are still significant detractors who would be losers in the bargain. Some of them are vocal, articulate and powerful. They cannot simply be ignored as their nuisance value in retarding or reversing this new bonhomie is not trivial.

In the face of massive economic challenges, a burgeoning population, energy and water shortages, and huge and growing numbers of unemployed workers, especially youth, Pakistan needs to look for ways to move itself out of the economic hole into which it has fallen. Greater trade with India offers an immediate and rich possibility of economic growth for both Pakistan and India. Recent meetings between the commerce ministers of both countries in New Delhi appear to have yielded some good intentions to increase trade from its current level of $2 billion a year to $6 billion, still well below what many scholars estimate to be the potential. Yet, the obstacles remain, in the form of rules and regulations that inhibit trade, and in the lack of private-sector initiatives that would surmount governmental foot dragging. In the end, it is the private sector— not official trade—that will boost incomes on both sides of the border. And the question remains: Will India and Pakistan see the advantage of opening borders as being mutually beneficial?

It may be useful to recall that in spite of many hurdles and obstacles;  India- Pakistan trade has recorded almost a tenfold increase between 2001 and 2011 reaching a level of $2 billion. Unofficial trade, including that through third countries, is also estimated at almost the same amount. Estimates based on different assumptions and models indicate a jump ranging between five to tenfold from the current levels  if all the barriers  – tariff and non-tariff barriers  -are dismantled.

Most studies calculate that because of low transport costs, dismantling of tariff and  non-tariff  barriers,  grant  of  MFN  status  to   India  by  Pakistan,  and improvement of logistics arrangements, the total volume of bilateral trade should be  able  to  rise  to  approximately  $8-10  billion  annually.  Pakistan and  India together ship $300 billion worth of goods to all parts of the world. This increased volume would still account for about 3 percent of the two counties’ trade volume. Therefore, the expectations at least in the short run should, therefore, be tampered with a sense of realism on both sides. The full scale realization of the potential of trade will take some time, but like a newly planted sapling, it will require tender care in nurturing and protecting it from strong winds and other extraneous influences that will otherwise uproot this weak plant.

Pakistan realizes that the liberalization of bilateral trade between Pakistan and India would not only lend impetus to both economies in a beneficial way but also remove the barriers to regional integration within South Asia. The potential advantage for Pakistan from broader regional economic integration appears to be large.  Going  well  beyond  the  immediate  creation  of  trade  flows,  capital investment and joint economic ventures, cooperation in the fields of IT, Science and Technology, Research and Development would, in all likelihood, boost productivity of domestic industries and stimulate economic growth.

The question often raised inside Pakistan is: Will expansion of trade with India bring benefits to Pakistan, or would it be swamped by its large neighbor? A lot of myths and misperceptions on this point have taken root in public discourse. Empirical evidence, based on an examination of specific sectors, indicates that India-Pakistan trade is a win-win situation. When combining the top two deciles of income distribution, India has a middle class of approximately 300 million people, with rising purchasing power that matches that of southeastern Europe, while Pakistan’s middle class is approximately 30 million. Even a 10 percent share of the Indian middle-class market would double the market size of Pakistani companies and businesses.

Trade with India: A Factual Analysis

Charts 1 and 2 show that India and Pakistan’s major export partners are countries outside the region ( except for landlocked Afghanistan which relies heavily upon Pakistan for exports as well as transit trade).

Numerous studies on India-Pakistan trade have so far demonstrated that the relaxation of constraints in the way of bilateral trade would benefit both countries. The theoretical argument is that countries in relative geographical proximity tend to trade more with each other than with more-distant countries because of lower transport and communication costs. Gravity models have been used to test this hypothesis empirically. (Under these models, the economic size and proximity of potential trading partners affects their trade flows.)

Source: Department of Commerce, Government of India

Source: Director General, Foreign Trade Institute of Pakistan

Researcher AmitaBatra, using an augmented gravity model, showed that all three gravity effects of distance, size, and income were statistically significant for India-Pakistan trade.[ii] An Indian Council for Research on International Economic Relations (ICRIER) study showed a much higher volume— about $10 to $11 billion (Pakistan, 55 percent textiles; India, 90 percent non-textiles) from the current official trade of about $2 billion a year.[iii]IjazNabi and AnjumNasim estimated that trade between India and Pakistan could increase threefold if Pakistan followed India’s example and accorded India Most Favored Nation (MFN) status, and both countries imposed a maximum tariff rate of 50 percent.[iv] A State Bank of Pakistan study came to the conclusion that bilateral trade could increase fivefold if MFN status were granted and non- tariff barriers were removed by both India and Pakistan.[v]

ZareenNaqvi and Philip Schuler estimated that the trade between the two countries could jump from $2.5 billion in 2007–08 to $5 to 10 billion, or two to four times its current basis.[vi] Mohsin Khan, a senior fellow at the Peterson Institute for International Economics, has suggested in a recent study that trade between the two countries could be five to ten times larger than the present value, thereby raising GDP and household incomes in both countries.[vii] Net welfare gains are positive in every single scenario, ranging from the most conservative to the most optimistic.

Trade will lead to some limited specialization and trade in intermediate inputs for use in exports to high-income countries.[viii] Granting MFN treatment to India would benefit Pakistan, and a free trade agreement (FTA) would further increase those benefits.

This paper draws extensively and freely from the findings of a major and comprehensive research study carried out by the State Bank of Pakistan (2006). Other more- recent studies (for example, Mohsin Khan’s work) have supported the findings of this one, but are not as broad-based. The State Bank of Pakistan (SBP) study showed that the potential of trade (exports plus imports) between the two countries amounted to $5.2 billion in fiscal year 2004 (FY04), when the actual trade was about $1 billion. In FY04, Pakistan imported 2,646 common items worth over $7 billion from the rest of the world (which accounted for 53 percent of the total imported items and 47 percent of the aggregate value). India also had exports of the same items worth over $15 billion (covering 24 percent of the total value of its imports).

Analysis revealed that for 48.7 percent of the items in FY04, the unit values for Pakistan’s imports were more than the unit values of India’s exports. Even after excluding the items which are currently permissible for imports from India, about 45 percent of the items still remain on the common list, which could be imported from India at a lesser cost than the current cost of imports from the rest of the world. Allowing imports of such items from India (i.e., expanding the current list of positive items that can be imported from India) will give Pakistan an estimated average savings of $400 to $900 million.[ix]

The present situation of India – Pakistan Trade, Direction of Trade Flows and their trading patterns can be seen in Table 1 – 4.

A disaggregated analysis at the sectoral level carried out by the SBP study illustrates the picture more clearly.  The broad conclusions drawn from the sectoral analysis contained in the SBP study are summarized.

Table 1: India Pakistan Trade (USD in millions)

Year Pakistan’s

Exports to India

India’s Exports

to Pakistan

Total Trade

Flows

2004-05 288 547 835
2005-06 293 802 1095
2006-07 343 1235 1578
2007-08 255 1701 1956
2008-09 320 1914 2234

Source: Federal Bureau of Statistics, Pakistan; Reserve Bank of India.

Table 2: Direction of Trade Flows from India and Pakistan

Trade

Flows from

Within Region To Other Developing Countries To High Income

Countries

India 4.2 4.5 17.5 27.4 78.2 65.3
Pakistan 4.5 12.4 12.0 23.8 81.2 61.9

Source: SAARC Secretariat, Kathmandu.

Table 3: India’s Trade with Pakistan & the Rest of the World (USD in millions)

Exports to Pakistan 1,914
India’s total Exports 189,000
Percentage Share of Pakistan 1.01%
Imports from Pakistan 320
India’s Total Imports 257,600
Percentage Share of Pakistan 0.12%
Trade from Pakistan 2,234
India’s Total Trade 446,600
Percentage Share of Pakistan 0.50%

Source: Economic Survey of India.

Table 4: Pakistan’s Trade with India & the Rest of the World (USD in millions)

Exports to India 320
Pakistan’s total Exports 19,121
Percentage Share of India 1.7%
Imports from India 1,914
Pakistan’s Total Imports 31,747
Percentage Share of India 6.0%
Trade from India 2,234
Pakistan’s Total Trade 50,868
Percentage Share of India 4.39%

Source: Federal Bureau of Statistics, Government of Pakistan.

Industry Wise Impact Analysis

Textiles and Clothing

The textile and apparel sector continues to be the driving force for economic growth in both India and Pakistan. This sector contributed less than one fifth to India’s exports but almost two-thirds in Pakistan. In both countries the textile and apparel sectors exhibit different degrees of specialization.  India  is  regarded  as  a  major  alternative  source  to  China  for apparel and high-value- added textile products. Pakistan, although a supplier of a limited range of products, is considered a competitive supplier of cotton goods, particularly men’s apparel, home textiles, and fabrics.

Currently, trade in textiles and clothing between India and Pakistan is almost non existent. The comparison of exports of both countries identifies 176 common items which have comparable unit values. Out of these 176 items, India has a price advantage (i.e., lower realized export unit value) in 48 textile products, while Pakistan has a price advantage in 128 textile products.[x] Pakistani textiles face a major disadvantage as competing imports from Bangladesh and Sri Lanka enter the Indian market with zero tariff while high tariffs are levied on Pakistani imports. Since other factors—such as quality, production, and design of products, etc.—are also important, it is hard to conclude on the basis of just export unit value that the granting of MFN status would result in a unidirectional flow of textile products, meaning Indian textile products would flood the Pakistani market.

The higher magnitude of RCA index[xi] in the case of Pakistan shows the vulnerability of the export earnings of Pakistan to sector-specific events. Pakistan’s economy is far less diversified as compared to the Indian economy,and depends heavily on the textile industry. Garry Pursell’s study shows that there would be some gains for both countries, but that the scope for penetrating each other’s domestic- use markets (in contrast to supplying inputs to the export industry) would be limited.13 High-quality products such as bed linens and cotton-lawn fabric from Pakistan are in demand in India.

Iron and Steel

India has been a major supplier of raw material (iron ore) to this vital industry, and accounted for 69.2 percent of the total imports of iron ore in the world, followed by Australia (19.9 percent) and Iran (10.9 percent).[xii]Unlike Pakistan, India has a well-established steel industry, and is a net exporter of steel and steel products. The Indian steel industry produces a wide range of steel products.  On  the  back  of  abundant  raw  materials,  highly  skilled  technical manpower,  and  competitive  labor,  India  is  the  eighth-largest  crude-steel producer, and the largest producer of sponge iron in the world.

Pakistan’s iron- and steel-product imports from India account for just a small fraction of its total imports. About 46 items are identified as potential imports that are cheaper to  import  from  India  on  the  basis  of  lower  unit  value  of  Indian  exports, compared to the import unit value of Pakistan’s imports from the rest of the world. Pakistan’s steel industry can benefit by sourcing its iron ore and coke from nearby India rather than Brazil and Australia. This should effect some reduction in the cost of production of finished steel in Pakistan and help the downstream industries which use steel as an input.

Chemicals and Pharmaceuticals

Pakistan’s chemical industry has by and large developed on a fragmented and ad hoc basis, motivated by a combination of the existence of a small local market and traditionally high tariffs. As a result, it suffers from the lack of economies of scale, national integration, and subsequent lack of competitiveness. As a result, the country is highly dependent on imported chemicals to cater to the needs of its agriculture and industrial sectors.

Compared to Pakistan, the Indian chemical industry is well established and has shown impressive growth over the years, contributing about 6.7 percent to the Indian GDP. In terms of volume, it is the twelfth largest in the world, and third largest in Asia. With a current turnover of about $30.8 billion, it accounts for 14 percent of the total manufacturing output in India.[xiii]

The total local production/consumption of pharmaceuticals is currently estimated at $2 billion. There are about 316 pharmaceutical manufacturing companies, including 30 multinationals (47 percent   share), which   are  meeting  around  80  percent  of  the  country’s requirement.  Almost  95  percent  of  the  basic  raw  materials  used  for  the manufacturing of medicines are imported from China, India, Japan, the United Kingdom, Germany, the Netherlands, and others. Other production inputs, such as technology, labor, packaging materials, power, and raw materials, are easily available, and the government provides good incentives for importing raw materials and technology.

Compared to the pharmaceutical industry of India, the size of Pakistani companies is relatively small, and hence uncompetitive. The Indian pharmaceutical industry has become a net exporter and is now putting up US Food and Drug Administration–approved plants, and is exporting to advanced economies. Indian companies are the only suppliers worldwide for some pharmaceutical raw materials. The country ranks fourth worldwide, accounting for 8 percent of the world’s production by volume and 1.5 percent by value. India is also among the top twenty pharmaceutical exporters, and among the top five manufacturers of bulk drugs in the world.

Out of the total imported chemicals and pharmaceutical products from India, 166 items had a lower unit value compared to the unit value of the same items imported from elsewhere. These items have the potential for enhancing imports from India. Pakistan already imports raw materials for its pharmaceutical products from India, and the scope for finished- product imports from India is substantiated by these unit-value comparisons.

Automobiles

The automobile industry in Pakistan operates under franchise and technical- cooperation agreements with leading world manufacturers, and can be broadly categorized into various segments, i.e., cars and light commercial vehicles (LCVs), two- and three-wheelers, tractors, trucks, buses, and vendor industry vehicles.  But the size of the industry and parts suppliers has remained much below its potential because of inconsistent policies and abrupt swings in allowing imports of fully built cars.

Compared with Pakistan, India has a strong engineering base, and has successfully created a sizable capacity for production of vehicles. It enjoys a clear edge over Pakistan in the automobile sector. Indian auto companies are highly cost-competitive due to appropriate levels of mechanization and low-cost automation, and have achieved a high level of productivity by embracing Japanese concepts and best practices. India is already the second-largest two- wheeler manufacturer, second-largest tractor manufacturer, and fifth-largest commercial vehicle manufacturer in the world, and has the fourth-largest car market in Asia.

The automobile industry in India is now gradually evolving to replicate those of developed countries.  Pakistan can  import  automotive  components  and  spare parts from India at a lower price than Thailand. On the other hand, India is expected to benefit from free trade due to its relatively low raw-material, electricity, and labor costs. This would make imports of automobiles from India much cheaper for Pakistan than those from other countries, such as Japan or Korea. Joint ventures between the firms from two countries located near the industrial clusters would lower the unit costs of production and distribution.

Information Technology

In India, the IT industry has made tremendous progress and has emerged as one of the fastest-growing sectors. In 1998, the IT sector accounted for only 1.2 percent of GDP. By 2009, its contribution had jumped to 5.8 percent of a much larger GDP.  The annual growth  rate  of  the  industry  has  been   simply phenomenal. The revenues earned in 2000 were only $4 billion. Ten years later they had surged to $62 billion. Infosys, for example, employed 10,000 people in 2001, which multiplied twelvefold, to 125,000 by 2010. A majority of the multinational IT companies operating have either software development centers or research development centers in India. India’s expertise in emerging technologies has actually helped the country to attract new customers, and IT and services companies in Europe and Japan are outsourcing to India.

Although the IT industry in Pakistan is in its infancy, it is growing at a fast pace, even as it struggles to catch up with the regional and global industry. Officially recorded IT exports increased from US $46 million in 2004–05 to US $250 million in 2009–10, showing a 40 percent annual growth rate. As per the World Trade Organization (WTO) – prescribed formula, the size of the IT industry in Pakistan is currently in the range of $2.8 to $3 billion, and IT-related exports are around $1.6 billion.[xiv] However, most of the companies are small-to medium-sized, with few entities concentrating on the export of software- and IT-enabled services. Pakistan has lagged behind other regional countries in using IT as a catalyst for economic revival.

This is one of the potential areas which could be exploited. India, with its wider software industry, can extend help to Pakistan to promote IT through the establishment of joint ventures. The wages of IT professionals in India are rising fast, and it is losing the labor-cost advantage. Hence, a joint venture between a Pakistani IT company, supplying skilled professionals of comparable quality at lower wages, and an Indian company, procuring international contracts in its name, would be a win-win situation for both the countries and the industry.

Another study on Pakistan-India trade, carried out by the World Bank, also concluded that Pakistan stood to gain from liberalization of trade.[xv]

Agriculture

The main argument in opposing the import of Indian agriculture goods into Pakistan rests on the plea that the Indian producers get subsidies on fertilizers, electricity and diesel. Indian farmers are thus said to have an advantage in selling their products to Pakistan. Other groups, particularly those concerned with food security in Pakistan, have argued that lower prices of agricultural products imported from India will benefit our consumers, dampen food inflationary pressures and ease supply shortages. But even the broad brush with which the farm lobby paints the gloomy picture cannot withstand scrutiny.

More than 50 percent of agricultural incomes in Pakistan originate from the livestock sector, which is under no threat from Indian producers. In fact, it is the import of milk powder from the EU countries at subsidized rates that is creating problems for the processed milk industry in Pakistan. Another 37 percent of incomes in agriculture sector are derived from major crops: wheat, rice, cotton and sugarcane and the relative economics of these crops does not suggest that the producers of these crops will be affected adversely by opening to India. Pakistani procurement prices of wheat have been relatively higher than international and Indian prices in the recent years. Both countries run wheat surpluses and compete in international markets.

Pakistan is self-sufficient in sugarcane and, like India, is a major exporter of rice to the rest of the world. The cotton crop falls short of the domestic demand by 2-3 million bales annually and the mills are free to import from whatever source they feel appropriate. Prices are fixed internationally and cotton is traded worldwide at those prices. Except in an odd year when there is shortage due to crop failure and Indian produce would enter the market to augment overall supply, there does not seem to be any other significant risk for producers of any of these major crops. In the event of supply shortages, Pakistani producers won’t be hurt while Pakistani consumers will be insulated from price shock arising from domestic crop failure. The remaining sub-sectors – forestry and fisheries – account for 3 percent of agricultural income and minor crops about 10 percent. It is only in respect of some of these crops – mainly fruits and vegetables (onions and potatoes), lentils, maize, gram – that trade will take place, mainly between the two Punjabs.

Past experience shows that trade between the two countries in vegetables, lentils etc. acts as a price stabilizing force because it equilibrates supply and demand. Due to the proximity between the Pakistan Punjab and the Indian Punjab (the Haryana-Delhi belt), low transportation costs and the time advantage make trade in perishable and fresh agricultural good quite attractive. When India falls short of onions or potatoes and Pakistan has a bumper crop or vice versa, countries, their farmers and consumers gain from these transactions. Imports will also force Pakistani farmers, if they are uncompetitive, to strive to become more efficient by adopting better production, storage and preservation techniques and reduce post-harvest losses.

So if evaluated in terms of the overall net gain, the limited agricultural imports covering only a small proportion of the total agricultural value added will act as a price-stabilizing influence, enhance consumer welfare and promote efficiency in the long run. The fears raised against agricultural imports appear highly misplaced. In the short term, it is possible that there may be some losers but they will switch over to other crops for better remuneration. Pakistan’s annual food import bill is about $5 billion. If some of the items currently imported from third countries are instead purchased from India at lower end-use prices, consumers will be better off without hurting agriculture.

Trade Liberalization under SAFTA

South Asia remains the least integrated region in the world with intera-regional trade flows averaging between 5 to 6 percent of the total exports. Table 5 shows that all other regional blocks are much ahead of South Asia in this respect. The South Asian Association  for  Regional  Cooperation  (SAARC)  member countries, including Pakistan and India, reached the landmark Agreement on South Asian Free Trade Area (SAFTA) on January 6, 2004, with a pledge to allow free trade among  member countries  by eliminating trade  barriers  and scaling down their tariffs in two phases, to 5 percent from January 1, 2006, onward. The treaty allows  free  cross-border movement  of  goods  within  the region, with the provision for a list of sensitive items for member countries to safeguard national interests.

SAFTA is likely to contribute significantly to intraregional trade, along with a scope   for enhanced   trade between India and   Pakistan—particularly   in transportation   equipment   and   engineering   goods,   including   IT   products. Complete elimination of tariffs under SAFTA may increase intraregional trade by 1.6 times over the existing level.[xvi] The intra-SAARC trade in South Asia is about $25 billion, or 4.8 percent of South Asia’s trade with the world. The above projections need to be viewed against the cost of noncooperation, which was estimated by an earlier RIS[xvii]study to be about $511 million for Pakistan. In other  words,  the  opportunity  cost  or  foregone  benefit  of  free  trade  within SAFTA is high.

Table 5: Trade with Regional Blocs (% of Total Exports)

1990 1995 2000 2005 2009
SAARC 3.5 4.5 4.6 6.6 5.4
ASEAN 18.9 24.4 23.0 25.3 24.5
EAC 17.7 19.5 22.6 18.0 18.9
CACM 15.3 21.8 19.6 23.2 22.3
CIS - 28.4 19.8 17.7 14.8

Source: SAARC Secretariat, Kathmandu.

SAARC: South Asian Association for Regional Cooperation

ASEAN: Association of Southeast Asian Nations

EAC: East African Community

CACM: Central American and Caribbean Market

CIS: Commonwealth of Independent States

Advantages of Trade Liberalization for Pakistan

The liberalization of bilateral trade between Pakistan and India would not only lend impetus to the integration of both economies, but it would also be seen as a good model by other nations in the region. The potential advantages of trade liberalization for Pakistan appear to be great.

Going well beyond the immediate creation of trade flows, dismantling tariff and non-tariff barriers would also boost productivity and economic growth, and promote broader regional cooperation in South Asia in all areas.

Trade liberalization will unambiguously benefit Pakistani consumers, since product  prices  fall  and  consumer  choice  increases  when  trade  barriers  are reduced or removed. Increased trade flow that stems from the lifting of import prohibitions for items coming from India would lead to additional customs revenue for Pakistan (if corruption can be avoided in the collection of customs duties). Within the protective walls of regional economies, both countries can achieve specialization in various subsectors of the economy. Moreover, the strengthening of bilateral/regional trade would also cushion the economies of both countries from global financial or stock-market shocks.

Bilateral trade balance with any particular country does not have to be positive. There would be no trade in that case. Pakistan would run a trade deficit with India just as it does with China, and surpluses with other countries. India is a larger,  more-diversified  economy,  and  also  produces  goods  that  Pakistan exports. The determining factor is whether the cost of imports from India is less than comparable-quality imports from other sources. In that case, Pakistan’s local industry and its consumers would both stand to benefit.

If the empirical evidence is so strong, why is trade between the two countries so low-less than 1 percent of Indian exports, and less than 5 percent of Pakistani imports? The volume of bilateral trade has not exceeded $2 billion, out of a total volume of Indian and Pakistani exports of about $200 billion. India and Pakistan’s major trading partners are shown in Tables 6 and 7.

Three main reasons lie behind the slow growth of trading relations between India and Pakistan: Political relations between the two countries have remained discordant and contentious over a long period of time. A trust deficit does not allow for stability, which is a prerequisite in order for any exchange of goods and services to take place.

Both countries have, until recently, pursued import- substitution policies that sheltered local industry behind protective barriers.

The commitment to regional economic integration in South Asia has remained quite weak.[xviii] Even in the face of bilateral political disputes, it is possible to promote trade within a regional preferential trading area framework. This has not happened in South Asia.

These constraints can be relaxed. Countries with adverse political relationships, without giving up their principled stand on disputes and differences, have engaged in cross-border investment, trade, and movement of people.

Table 6: India’s Major Trading Partners (Percentage Share)

Country Exports Country Imports
USA 10.9 China 15.0
UAE 13.4 UAE 11.4
Japan 9.2 Switzerland 8.6
Germany 7.1 S. Arabia 7.1
UK 6.4 USA 7.0
Singapore 2.2
Total ($ billions) 178 Total ($ billions) 287

Source: Department of Commerce, India.

Table 7: Pakistan’s Major Trading Partners (Percentage Share)

Country Exports Country Imports
USA 17.4 UAE 14.5
UAE 8.9 S. Arabia 9.7
Afghanistan 8.1 Kuwait 6.9
UK 4.9 Malaysia 5.0
Germany 4.3 USA 4.6
Hong Kong 2.2 Japan 4.4
Germany 3.4
UK 1.7
Total ($ billions) 19.3 Total ($ billions) 34.7

Source: Federal Bureau of Statistics, Government of Pakistan.

Over time these activities have helped to foster a better understanding of each other’s viewpoints. Although Singapore and Malaysia broke up as partners in a political union, both countries have improved political relations because of close economic ties. Confidence-building measures and the creation of stakeholders in the countries can eventually defuse the tension and soften the ground for peaceful resolution of disputes and disagreements.

It is therefore not right to wait to resume economic relations until the bilateral political disputes are resolved. If economic engagement is fierce and picks up steam, the hawks in each country may be confronted by the new stakeholders, who arebenefiting  from  such  engagement.  Investors,  traders,  transporters, bankers, and business groups who will be working for Indian firms in Pakistan, and vice versa, will act as strong lobby groups to nurture, preserve, and promote peaceful bilateral political relations between the two countries. Any souring of the relations will hurt their vested economic interests. Resumption of economic relations should be allowed without any preconditions, and without the countries giving up their respective negotiating positions on political disputes. Composite dialogue between India and Pakistan should carry on at the same time to resolve those disputes and disagreements.

Prospects for Economic Integration

On  the  second  constraint,  it  is  heartening  that  both  India  and  Pakistan  have opened up their economies, abandoning the old import-substitution policies that favored  autarky instead  of  importing  lower-cost  products  from  overseas,  and embarked upon a process of integration with the world economy. The reforms they have carried out—such as cutting tariff rates, elimination of Quantitative Restrictions, regulating duties, and para-tariffs—leave them in a much better position to pursue preferential liberalization.

Pakistan and India signed SAFTA in January 2004, which came into force in January 2006.  SAFTA is  aimed  at  reducing and  eventually eliminating tariff barriers, facilitating cross-border movement of goods, promoting fair competition in the region, and creating an effective framework for regional cooperation. But the agreement is still hindered by fairly restrictive “sensitive lists” strict rules of origin, and a slower time frame and scope.

A recent study by NishaTaneja and colleagues has attempted to prune India’s sensitive list under SAFTA.[xix] Of the five member countries of SAFTA studied, Sri Lanka, Nepal, and Bhutan already have bilateral free trade agreements with India. Bangladesh enjoys the LDC status, and the operational sensitive list applicable to it contains only 331 items. This leaves Pakistan the only country having a non-LDC status. The sensitive list applicable to Pakistan has the largest number of items, 868 (910 under the six-digit level restructured list).

Regional trade agreements like SAFTA, if fully implemented, can have a positive effect on growth, trade, technological diffusion, and foreign investment. Trade within the region will unleash new technology, lower domestic prices, provide new technology, and usher in economies of scale in production and distribution as the effective market size expands. Joint ventures in pharmaceuticals, chemicals, petrochemicals, automobiles, agro processing, technology- transfer arrangements among IT firms and joint gas-pipeline projects are some of the possibilities that can take place within SAFTA if harmonization takes place.

Empirical studies on South Asian regional trade have shown mixed results primarily because of the smaller countries of the region—Afghanistan, Bhutan, Nepal, Maldives—which are landlocked, or small islands in the presence of a giant continental economy, such as India. Other research has concluded on the basis of computable general equilibrium model simulations that the policy of unilateral liberalization would benefit South Asian countries much more than SAFTA, as small countries would gain little, or even lose.[xx]

A European Trade Study Group (ETSG) report on regional trade in South Asia comes to an opposite conclusion using the gravity model.[xxi] Its analysis shows that there is a significant trade-creation effect with the rest of the world under the South  Asian  Preferential  Trade  Agreement  (SAPTA). This report finds no evidence of the trade diversion effect with the rest of the world, and argues that further regional integration may bring about substantial benefits to the SAARC region, while SAFTA is most likely to promote interregional trade through further dismantling of tariff and other non-tariff barriers among members.

The Ease of Doing Business

Both India and Pakistan continue to use tariff and non-tariff barriers (NTBs) to protect their domestic producers, even after reforms have led to overall economic liberalization.[xxii] India is ranked 115th out of 125 countries on the World Bank’s Trade (MFN) Tariff Restrictiveness Index (TTRI), and Pakistan stands at 102nd place. India’s trade regime is much more restrictive than other large  emerging  economies  like  Brazil,  China,  Mexico,  and  Russia,  or  in comparison with neighboring countries in South Asia. India’s ranking on the “ease of doing business” indicators are also quite low, with the latest ranking at 122nd out of 178 countries, compared to Pakistan’s rank at 77th place for 2006– 08.[xxiii]

Research by ZareenNaqvi shows that India’s MFN applied average tariff rate, at 14.5 percent (in 2007), is much lower than tariff rates a decade ago; however, the applied tariff rates for agriculture exports, at 39 percent in 2007, is one of the highest in the world. This is a major barrier that Pakistani exporters of agricultural products face in terms of expanding trade with India.[xxiv]

In a number of sectors, specific tariffs and regulatory duties outside statutory MFN tariff rates are levied. Potential textile exports from Pakistan are subject to specific duties, which can go as high as 50 to 100 percent in equivalent terms. The Pakistani exporters of textiles and garments say that these are important barriers in their ability to access the vast Indian markets. According to Taneja’s survey of Indian exporters doing business with Pakistan, very few NTBs in Pakistan restrict trade.[xxv]The  World  Bank’s  frequency-  coverage  ratio  of  non-tariff  barriers measures India’s at 51 percent, one of the highest in the world. In comparison, Pakistan’s ratio was much lower, at 29 percent. It also uses stringent domestic standards, whereas Pakistan applies normal international standards.

.

Pakistan’s Concerns on Trade with India

The focus group consultation with the businessmen engaged in Automobile, Chemicals, Pharmaceuticals and Textiles sectors etc. held at Karachi and Lahore during  early  2012  revealed  strong  reservation  about  the  non-tariff  barriers imposed  by  India.  According  to  them,  Technical  Barriers  to  Trade  (TBT), Sanitary and Phyto-Sanitary Measures (SPS) are in fact acting as powerful determents to exchange of goods. Unless these are rationalized and simplified, the smooth  flow  and  desired  level  of  Pakistani  exports  from  Pakistan  will  be hindered. Table below shows the Indian non-tariff barriers, Pakistani exporters have identified:

Sanitary and Phyto-sanitary measures

Technical barriers to trade

Quotas and Import licenses on 600 items

Aggressive Use of safeguard and anti-dumping measures

Frequent invocation of Countervailing duties

Stringent License requirements from the Bureau of Indian Standards

Multiple custom clearance requirements

Non-standard custom valuation methodology

Stringent and lengthy certification requirements

Restrictions on rail movement of goods

Complicated and restrictive visa requirements

Long dwell times at ports and border points

Transit restrictions

Absence of testing labs at the border crossing points

State Governments’ restrictions on use, sale , and consumption of certain

goods

Uncertainty about inter-state movement of goods

Non-acceptance of letters of Credit issued by Pakistani banks

In addition to the general reservations expressed about the above NTBs there were sector   specific   grievances   that   are   briefly   summarized   in   the   following paragraphs. Some sectors such as Textiles were, on the contrary, quite upbeat about the prospects of their industry.

The Pharma industry’s main concern was that India has the advantage of having a reservoir of essential raw materials and large economies of scale that will ease out their products due to lower costs of production and distribution of competing products from across the border. Laxity in enforcement of standards would also bring in drugs of dubious quality at low prices edging out some of the local substitutes from the market. Quality Control measures in Pakistan are not too stringent and it was argued that arrangements have to be put in place to apply the same  quality  standards  effectively  to  Indian  products  as  India  has  against Pakistani products.

Agriculture sector was concerned about many kinds of hidden and implicit subsidies granted by several State Governments in India such as on electricity for tube wells. These subsidies would not provide a level playing field for Pakistani agriculture  producers  to  compete.  They  also  pointed  out  that  the  May  2006 notification of Super Basmati by the Indian Ministry of Commerce has been challenged by Pakistani exporters in 2008 and the case is still pending before the court despite a passage of four years. Barriers in the movement of trucks across the state boundaries and the consequential delays do damage perishable commodities.

In the Automotive sector, there is a clear difference of opinion. Some of the Japanese companies favor the opening of trade as they can import components and parts at much cheaper rates from India compared to Japan. The Manufacturers of auto parts are opposed to the idea because they believe that Indian auto parts will flood the Pakistani market and decimate the local industry. Efficient and low cost Pakistani exports would still be at a disadvantage as Indian assemblers have a tendency to prefer locally manufactured parts and have entered into long term agreements with these local firms. The question of switching from their partners to other suppliers, however competitive they may be, does not arise.

Chemicals and synthetic fiber sector argued that India was having a surplus of fiber which was equal to 80 percent of the local demand in Pakistan. They could simply dump them in the Pakistani market as the enforcement regime of Anti- dumping laws was quite weak. The domestic fiber industry which has recently invested hundreds of millions of dollars in expansion of the capacity would suffer financially.

Textile manufactures were by and large optimistic that on price and quality they can  capture  a  significant  share  of  Indian  market  provided  the  Indian  textile industry  does  not  use  the  Government  machinery to  thwart  their  inroads  by different kinds of administrative and restrictive practices or non-tariff barriers. Some of the cotton lawn, home textiles and bed wear manufacturers were already exploring the opportunities for joint ventures with Indian partners to open retail outlets for selling those products which are in high demand. Imports of textile machinery from India will be cost efficient as compared to importing it from other parts of the world. Some of the garment and knit wear and other value added manufacturers expressed the concern that their Indian competitors were receiving various hidden subsidies and the level playing field was not even.

While it was explained that the non-tariff barriers were not Pakistan-specific and were applicable across the board the opponents of the trade liberalization narrated their actual experience with cross-border trade in the past which had not been too pleasant. Anecdotes of delay by the Customs Authorities, Testing laboratories and Bureau of Indian standards and Railways causing losses to Pakistani exporters were  cited  at  these  meetings.  When  it  was  pointed  out  that  the bureaucratic indifference and inertia and hassle formed part of the administrative culture in the two countries that had inherited the common civil service it was asserted that the difference in the attitude towards Pakistani exporters was quite stark.

Major Risks to Trade Relations

What are the major risks that can derail this process? There are many but at least eight of them need to be highlighted and steps taken to mitigate them.

First, there exists a huge Trust Deficit between the two countries for the reasons that are well known. This Deficit dominates the populist thinking on both sides. The bridging of this Deficit is not easy, will take some time and will depend upon a series of positively reinforcing measures taken unilaterally by both sides in a consistent manner. There is a palpable fear of collective punishment and sanctions on Trade against Pakistan if something goes wrong on the security and political front. Any unforeseen or unplanned contingency can trigger strong adverse reaction on either side. So far the two countries have behaved responsibly in military terms in post 1998 era but there is no guarantee that the axe of such a triggering episode may not fall on Trade and the Trade flows may be disrupted. Both the dialogue process and trade relations should continue ―”uninterrupted and uninterruptible” as Mani Shankar Aiyar has argued. At times of crises the policy of engagement rather than abrupt withdrawal would prove to be effective in defusing the situation and finding an amicable resolution to the problem.

The possibilities of the knee jerk reaction of suspending the trade or putting some tough retaliatory measures in the future cannot be ruled out. This stop and go policy would act as a powerful deterrent to the establishment of long term relationships across the borders as it creates uncertainty, fear and unpredictability about the trade regime.  This tendency has to be curbed if the businessmen have to take advantage of the liberal trade regime.

Second, the South Asian political parties when in opposition behave quite differently and diametrically opposed to their policies when in power. Scoring points and discrediting the ruling party are their main hobby horses. They may easily join the ranks of the extremist elements who are the biggest detractors of normalizing relations between the two countries. The trigger point for such a coalition may be the persistence or expansion of trade imbalance in favor of India. Such bilateral imbalances are to be expected as India is a much larger and diversified economy.   The political backlash caused by this imbalance may put undue  pressure  on  anyone  of  Government  in  Pakistan  which  may choose  to sacrifice Trade in order to survive. This myopic action which may win some relief for the ruling party will do enormous damage to the promotion of trade in the long run. Fickle minded populist actions are counterproductive for durable relationships to take shape.

The third risk arises mainly from the possible ascendency of the losers lobby. It must be realized that in the short run there will be some losers and some winners from opening up of the trade. While Traders and Importers in both countries would be happy to see their business expanding the inefficient manufacturing firms will be losers from this liberalization. They may lobby the Government and political parties by making noises that the onslaught of cheaper imports from the other country is destroying domestic industry and jobs. Depending on the power and influence of the lobby it is quite conceivable that some retaliatory measures may be taken that will kick off a spate of countervailing measures. The consequential  dilatory  tactics  would  once  again  widen  the  Trust  Deficit  and hamper the growing trade relations.

Fourth, the media and the civil society in both India and Pakistan have become quite powerful. In case the Small and Medium Enterprises suffer disproportionately from the trade liberalization the media could take up their cause and create such venom that the Trade flows can be set back .Another possibility is that integration through trade and capital flows may amplify the contagion effect. A negative shock to the Indian economy may be transmitted to the Pakistani economy which may slow down as a result depending upon the trade intensity. The media in Pakistan may use such occasions to put pressure on the Government to take some protectionist measures. If as a consequence tariffs, quantitative restrictions or non-tariff barriers or capital controls are introduced the credibility of the liberalization process will be damaged setting back the evolution of relationship. It is in the interest of everyone that the media should have enough positive stories to tell which generates goodwill. Frequent exchanges between the representatives of the media and holdings of seminars, meetings, roundtables of civil society organizations can help clear the mental fog and obdurate obfuscation. The businesses in the two countries will be well advised to advertise through the other countries’ media.

Fifth, there would be constant need for the validation of the new popular narrative that the proponents of India-Pakistan Trade are espousing.  Consumers should feel that the procurement of certain goods from the other side has really benefitted them  while the  producers should  be  able  to  testify that  the sourcing  of raw materials, machinery or components has in fact lowered their costs. Such human interest stories should be disseminated widely through the popular as well as social media. The validation of the new narrative can become one of the contributory factors in bridging the Trust Deficit.

Sixth, the Composite Dialogue on outstanding political issues should continue with seriousness, commitment and constructive attitude. If such a dialogue does not proceed forward those who are opposed to normalizing economic relations would be able to gain grounds by asserting that the principled stand and the core issues have been abandoned for the sake of paltry material gains. This can set the ball rolling for a larger movement that would blame Trade as the major impediment in the way of resolution of political issues. The political leaderships of the two countries are very much committed to peaceful resolution of the issues confronting them and the momentum on the dialogue should not be lost.

Seventh, other areas of economic cooperation such as subcontracting by Indian IT Firms to Pakistani Companies, Tourist Packages, and collaboration in Higher Education, Agriculture, Health, Research and Development between the two countries would be highly beneficial. India has developed many first rate hospital facilities at much lower costs than the Western countries. There is no reason as to why branches or subsidiary hospitals cannot be set up in Pakistan as they have been done in Bangladesh. Indian IT firms are market leaders in Business Process Outsourcing but are faced with increasing labor costs. They can sub-contract some of the work to Pakistani firms at rates that are relatively cheaper than what they pay in India and thus maintain their market share.

Eighth, there should not be any iota of doubt that disputes will arise in the course of business and grievances of all kinds will emerge. It is imperative that a Dispute Resolution/ Grievance Redressal mechanism is put in place right from the beginning. This mechanism should be expeditious, inexpensive and equitable. In place of the Governments, the Confederation of Indian Industries CII/ Federation of Indian chambers of Commerce and Industry FICCI and Pakistan Business Council PBC/ Federation of Pakistan chambers of Commerce and Industry FPCCI should be involved in setting up and operating this mechanism.

To overcome these concerns and anxieties of Pakistani businesses India—a much bigger economy accounting for more than 80 percent of Gross Regional Product, and imbued with self-confidence and aspirations to become an economic power— could demonstrate a greater degree of generosity by removing these tariff and non-tariff barriers unilaterally without risking much in return. A wider offer to its neighboring  countries  in  terms  of  opening  up  the  markets  and  trade  and removing barriers to mobility would ultimately benefit India, reducing hostility and favoring its exporting and importing industries, as well as benefiting Indian consumers with lower prices for goods imported from Pakistan. It would be in India’s   long   term   interest   to   establish   asymmetric   relationships   with   its neighbors and provide more concessions to them, initially expecting less from them in return. This posture will be helpful in generating wider economic benefits for India itself and its trading partners in South Asia in the long run.

Given the large and growing size of its effective market, the economic losses to India would be minuscule, while political goodwill and returns would be substantial over time. Pakistan, Bangladesh, and Sri Lanka would be much better off economically if they were able to penetrate the buoyant Indian market. Friendly, peaceful, and irritant-free neighbours would aid rather than hinder India in  moving toward its  long-term  goals,  enunciated periodically by its  leaders. South Asia, a region with the highest number of people living below the poverty line, would surge ahead.

Recommendations for Bilateral and Regional Economic Cooperation

While India and Pakistan continue their dialogue in an effort to resolve core political issues, they should start by focusing  on the removal of  nonpolitical constraints that will promote bilateral trade. Businessmen in both countries will then be able to take advantage of the opportunities that will present themselves.

Short-Term Goals

The  following  tasks  should  be  carried  out  immediately:  trade  facilitation through expeditious border crossings; streamlining of documentation requirements; coordination of border agencies; opening of new border crossings; quick customs clearance; improvement of electronic data interchange, telecommunication, and transport links; creation of new shipping protocols; and the easing of visa restrictions for businessmen. In addition, increase railway, air, and road connections between the two countries.

Pakistan should phase out the negative list, allow more items through land and  while India should reduce its tariffs  on  agriculture  commodities,  textiles,  and  other  goods  that  are  of potential value to Pakistan.

Both countries should implement the phasing out of the sensitive list (of items that each country deems important for its economy) agreed under SAFTA over the next few years. A restrictive list would nullify all the potential gains of preferential trade access.

Managing transition is quite critical to the future evolution of the relationship. If too abrupt large scale visible and one sided changes take place, then the lobbying efforts of those adversely affected will intensify. India being the large economy has to pay particular attention that their export expansion is mainly substituting more expensive machinery, equipment, raw material, components and intermediate goods from third countries which will help Pakistani manufacturers in lowering their cost of production. Export of technology from India will be highly welcomed. The phasing,  sequencing,  timing,  quantum  and  composition  will  have  to  be monitored  carefully  to  avoid  disruptive  forces  to  surface.  Although it  is realized that the transaction will take place mostly between the private sector parties the Ministries of Commerce in the two countries will have to use some moral suasion in the transition phase. Voluntary Export Restraints by India for limited period may also be considered as a policy option if it is found that certain  imports  are  exceeding  their  threshold  value  and  are  hurting  the Pakistani industries particularly Small and Medium Enterprises.. After all, the volume of Indian exports to Pakistan will remain miniscule – 2 percent of the total at best. Any news stories that Indian goods have risen by 100 percent in one year would prove disastrous. Large bilateral trade imbalance should be kept to the minimum and promotional activities to allow Pakistani exporters access to Indian market would help a great deal.

Rationalize and simplify the technical barriers to trade and sanitary and phyto-sanitary measures[xxvi] which are, in fact, acting as powerful deterrents to the exchange of goods. These are, in effect, NTBs that hinder the flow of goods.

Agreement reached on visa liberalization should be implemented both in letter and spirit.

One of the major problems impeding larger India-Pakistan trade flows is the poor state of logistics. The World Bank Logistics Performance Index that measures the efficiency of the Customs Clearance process, Quality of trade and transport-related infrastructure, ease of arranging competitively priced shipments, competence and quality of logistics services, ability to track and trace consignments and frequency with which shipments reach the consignee within the scheduled or expected time and places both the countries quite low. Although the new Integrated Border Check at Wagah – Attari would allow ten times more trucks to cross other logistics snags would have to be dealt with quickly. Special task forces with adequate powers should be formed for at least the first year to solve the problems and facilitate flows of goods and people.

India, as the largest economy in the region, has to pursue a more vigorous process of dismantling ―behind the border barriers for realizing its potential. The maze of byzantine regulations and rules and the business processes for cross border-exchange have to be simplified and streamlined. For a country that has some of the most progressive entrepreneurs, eminent intellectuals, scientists and innovators, globally competitive human resources, it is not comprehensible as to why it cannot carry out these needed reforms that will help to realize its potential.

Businessmen on both sides have outlined the requirement for opening new border points for trade with spacious loading zones for ease of truck and rail movement, modernization of rail transportation, a new shipping protocol and deregulation  of air  services.  While both  countries  have  very high  mobile phone penetration they are not allowed to avail the roaming facility when visiting the other country.  The 2006 Composite Dialogue between India and Pakistan had on its agenda the resumption of rail services between Khokraparand  Munabao,  bus  service  between  Srinagar  and  Muzaffarabad;  religious visits to Lahore and Nankana Sahib; a new shipping protocol; the deregulation of air services; and joint registration of basmati rice. This agenda should be revived and agreements reached to implement these measures.

These are, in effect, NTBs that hinder the flow of goods. In 2005, Governor Y. Venugopal Reddy and the author had signed an agreement to open branches of two Indian banks in Pakistan, and two Pakistani banks in India. This agreement has not yet been implemented, as procedural difficulties have been allowed to overwhelm the substance of the agreement. Without banking services, the opening of letters of credit, and cross-border fund transactions, trade cannot take place.

Medium- to Long-Term Goals

Replace domestic tax, tariff, and subsidy policies that distort incentives for production and trade in both countries with more-neutral policies.

Strengthen the policies used to manage and facilitate trade integration—such as the setting of standards, quality control, technical regulations, and material testing—and make them more user-friendly.

Harmonization  of  legal  regulations  for  investor  protection,  contract  and intellectual property rights enforcement, and labor relations would promote the relocation of industries within the region, as the expanded market size and mobility of goods and services would result in economies of scale. Choosing locations for inputs, components, and raw materials that have low transaction costs would confer comparative advantage to final finished goods.

The 2006 composite dialogue between India and Pakistan had on its agenda the resumption of rail service between Khokhrapar and Munabao; bus service between Srinagar and Muzaffarabad; religious visits to Lahore and Nankana Sahib; a new shipping protocol; the deregulation of air services; and joint registration of basmati rice. This agenda should be revived and agreements reached  to  implement  these  measures.  If  implemented  sincerely,  these measures will open up a new vista for the two countries in the twenty- first century. It is high time the political leadership of India and Pakistan demonstrate the courage and conviction necessary to facilitate trade between their countries, for the benefit of their populations and the region overall.

Both countries should make  SAFTAwork and agree on a phasing out of the sensitive list (of items that each country deems important for its economy) over the next few years. A restrictive list would nullify all the potential gains of preferential trade access.

Conclusion

To conclude, the future growth, disruption or slow death of India-Pakistan Trade will depend on whether a proactive, sensible system is put in place to manage the relations. It is in the mutual interest of the two countries to strive for an enduring uninterruptible long term relationship that is not prone to sudden disruptions, abrupt retaliations and knee jerk reactions. There is no guarantee that this would be an easy or smooth process but at least there is one change that can make some difference.  The usual South Asian bureaucracy driven approach that is reactive, slow and ponderous can sooner or later act as the kiss of death. A more private sector led, problem solving and getting on with the job approach has better chance of avoiding some of the pitfalls and producing the expected results.

Annex –  I

SECTORAL COMPOSITION OFNEGATIVELIST

Automobile 385
Iron and Steel 137
Paper andBoard 92
Plastic 83
Textile 74
Electric Appliances andMachinery 57
Pharmaceuticals 49
Machinery 37
Chemicals 33
Sports Goods 32
Ceramics 28
Cutlery 22
Glass 22
Miscellaneous Manufacturing 22
Leathergoods 19
Rubber goods 19
Agriculture 16
Furniture 16
Aluminum products 12
Surgicalgoods 10
Footwear 7
Soap and Toiletry 7
Meters 6
Metal Products 5
PrefabBuilding 5
Stone and Marble 5
Wood 4
Gems and Jewelry 3
Optical Fiber 2
1209

References

Armstrong,   Shiro   (2011).   “East   &   South   Asia   in   Global   Trade   &   Economic Development” a paper presented at EABER/SABER workshop held at ANU, Canberra.

Batra, Amita (2006), “India’s  Global Trade Potential”,  Global Economic Review, Vol.

35, No. 3.

Batra, Amita (2004). India’s Global Trade Potential: The Gravity Model Approach.

Working Paper No. 151. Indian Council for Research on International Economic

Relations, New Delhi, India.

Garry Pursell (2007), “Pakistan–India  Trade: Impact on the Textile Sector”, cited in

Naqvi and Schuler, 2007.

Government of Pakistan (2010), The Tenth Five-Year Plan, 2010–15 (Draft) Planning

Commission, Islamabad.

IjazNabi and AnjumNasim [eds.] (2001), “Trading with the Enemy in Regionalism and

Globalization”, SajanLahiri, London: Routledge.

International Finance Corporation (2007), “Doing Business”, World Bank Report.

J.  S.  Bhandara  (2003),  “How  Desirable  Is  the  SAFTA?  A  Quantitative  Economic

Assessment”, The World Economy.

Mohsin S. Khan (2009), “India-Pakistan Trade: A Roadmap for Enhancing Economic Relations” policy brief, pp. 9–15 (Washington, D.C., Peterson Institute for International Economics).

Naqvi,  Zareen  and  Philip  Schuler  [eds.]  (2007),  “The  Challenges  and  Potential  of

Pakistan-India Trade,” The World Bank, Washington, D.C.

Naqvi,  Zareen,  Philip  Schuler,  &Kaspar  Richter  (2007),  “Pakistan–India  Trade: Overview and Key Issues”, Chapter 1 in Naqvi and Schuler, Table IV.

Naqvi, Zareen (2008), “Pakistan-India Trade Potential and Issues”, [Unpublished].

NishaTaneja (2007), “Pakistan-India  Trade: The View from the Indian Exporters”,  in

Naqvi and Schuler.

NishaTaneja  and  Saon  Ray,  NeetikaKaushal,  Devjit  Roy  Chowdhury  (2011),

“Enhancing Intra-SAARC Trade: Pruning India’s Sensitive List under SAFTA,”

ICRIER Working Paper 255, New Delhi.

State Bank of Pakistan (2006), “Implications of Liberalizing Trade and Investment with

India”. Research and Economic Policy Department Report.

S. W. Hirantha (2004), “From SAPTA to SAFTA: Gravity Analysis of South Asian Free

Trade”, European Trade Study Group.


The author is a former Governor of the State Bank of Pakistan, former Chairman of National Commission of Reforms and presently the Director of the Institute of Business Administration.


ShiroArmstrong,“East& SouthAsiainGlobalTrade&EconomicDevelopment”,A paper presentedatEABER/SABERworkshopheldatANU,CanberraonAugust18,2011.

AmitaBatra,“India’sGlobalTradePotential,”GlobalEconomicReview,Vol.35,No.3(2006).

AmitaBatra,“India’sGlobal TradePotential:TheGravity ModelApproach,”WorkingPaper151, IndianCouncilforResearchonInternationalEconomicRelations(ICRIER),2004.

IjazNabiandAnjumNasim(eds.),“TradingwiththeEnemyinRegionalismandGlobalization,”SajanLahiri,London:Routledge,2001

StateBankofPakistan,ResearchandEconomicPolicyDepartmentReport,“Implicationsof LiberalizingTradeandInvestmentwithIndia,”2006.

ZareenNaqviandPhilipSchuler(eds.),“TheChallengesandPotentialofPakistan-IndiaTrade,” TheWorldBank,Washington,D.C.,2007.

MohsinS. Khan,“India-PakistanTrade:ARoadmapforEnhancingEconomicRelations”policy brief,pp.9–15(Washington,D.C.,PetersonInstituteforInternational Economics),2009.

Usinganintra-industryflowmatrix,itcanbesurmisedthatagriculturalrawmaterials,ironand

metals,automotive parts,chemical,elementsandcompounds,andcottonfabricscanbenefit bothcountries.Bothcanspecializeinproductsatdifferentstagesofproduction, orin differentiatedproducts.

Thenegativelist,for example,includespharmaceuticals,cosmetics,andjewelry,whilethe positivelistincludes,amongotheritems,chemicalelementsandcompounds,concentratesof ironandsteel,tiresandtubesofrubber,machineryanditsparts,etc.

Single yarn, cotton fabrics, denim, woven fabrics, ensembles, jackets and blazers, trousers, blouses, T-shirts, jerseys, men’s swimwear, skirts, garments.

Revealed comparative advantage (RCA) is a measure of competitiveness, and is estimated as a ratio of the share of a given product in a country’s exports to its share in world exports. If it takes a value greater than 1, the country has an RCA in that product. If it is less than 1, the country has a comparative disadvantage.

State Bank of Pakistan report, 2006

StateBankofPakistanreport,2006

Government of Pakistan, The Tenth Five-Year Plan, 2010–15 (Draft) Planning Commission, Islamabad, May 31, 2010.

ZareenNaqvi,PhilipSchuler,andKasparRichter,“Overview”chapterinNaqviandSchuler, 2007.

Table 4

ResearchandInformationSystemforthenonalignedandotherdevelopingcountries.

ZareenNaqvi,“Pakistan-IndiaTradePotentialandIssues”(unpublishedpaper),2008.

NishaTanejaandSaonRay,NeetikaKaushal,DevjitRoyChowdhury,“EnhancingIntra-SAARC

Trade:PruningIndia’sSensitiveListunderSAFTA,”ICRIERWorkingPaper255,NewDelhi,(April

2011).

J.S.Bhandara,“HowDesirableIstheSAFTA?A QuantitativeEconomicAssessment,”TheWorld

Economy,2003.

S.W.Hirantha,“FromSAPTAtoSAFTA:GravityAnalysisofSouthAsianFreeTrade,”European

TradeStudyGroup,2004.

Naqvi,2008.

InternationalFinanceCorporation,“DoingBusiness,”2007.

Naqvi,2008.

NishaTaneja,“Pakistan-IndiaTrade:TheViewfromtheIndianExporters,”inNaqviand

Schuler,2007.

Technical barriers to trade pertain to matters of regulations, standards, testing and certifications prescribed by each country. Sanitary and phyto-sanitary measures are the standards used to maintain food that is safe, for human and animal health protection and safety regulations.

Comments are closed

Copyright 2013, Criterion Quarterly. All Rights Reserved.

Log in - Criterion Design by Nutskulls