Pakistan-India Trade: What Needs to be Done? What Does it Matter?
Last fall, the Pakistan government announced its intention to grant Most Favored Nation (MFN) status to India, replicating a decision made earlier in New Delhi and potentially laying the groundwork for greatly expanded trade between the two South Asian neighbors. While fundamental disagreements remain unresolved, Islamabad's MFN decision suggests that it is prepared to deepen trade ties. Optimists assert that increased trade and the ensuing socioeconomic benefits can build constituencies in both countries for more cooperative bilateral relations, thereby also opening the door to progress on core political and security issues.
Recognizing the potential significance of trade in the Pakistan-India relationship, the Wilson Center’s Asia Program, with co-sponsorship from the Program on America and the Global Economy, and support from the Karachi-based Fellowship Fund for Pakistan, hosted a full-day conference on April 23, 2012, that focused on MFN as an important step toward expanding Pakistan-India commercial linkages.
In the opening panel, Ijaz Nabi of Lahore University of Management Sciences argued that enhanced trade with India would allow Pakistan to become an “economic hub” in Asia, thereby enabling Pakistan to benefit from China’s trade surplus and ample savings; from resource-rich Central Asia and Iran; and from rising India. Pakistan has served as this hub before; in the pre-colonial era, several important trade routes ran through present-day Pakistan—extending from Iran, Afghanistan, and Central Asia in the west to India in the east. These routes were later severed by colonial-era borders and poor relations with India. For Pakistan to once again become a hub for these east-west trade routes, Nabi argued, it must not only liberalize trade with India, but also strengthen infrastructure and improve employability and worker productivity in the areas serving the former trade routes, including the upper reaches of Sindh Province in southern Pakistan and the cities of Lahore and Peshawar further north.
Arvind Virmani, providing an Indian perspective, echoed Nabi in his robust support for a deeper bilateral trade partnership. Virmani, of the International Monetary Fund, said that media coverage tends to fixate on the risks and negatives of Pakistan-India trade. He called on Indians and Pakistanis to better “publicize the positives”—such as the fact that more trade would eliminate the “deadweight losses” resulting from diverting commerce to third countries. He cited a variety of research findings that underscore the economic benefits of liberalized trade. For example, a study produced by the Indian Council for Research on International Economic Relations concludes that the free trade agreement between India and Sri Lanka has allowed for more economies of scale. Virmani concluded that the regional trade crossroads discussed by Nabi can be re-established by rejuvenating the South Asia Free Trade Agreement, an arrangement long undermined by Pakistan-India enmity.
Ishrat Husain of the Institute for Business Administration in Karachi highlighted some of the factors that risk derailing the Pakistan-India trade regime. First, a terrorist attack on India traced back to Pakistan could prompt New Delhi to retaliate by clamping down on trade. Second, opposition political parties in both countries could take virulently anti-trade positions that pressure Islamabad and New Delhi into supporting less trade-friendly policies. Third, “losers’ lobbies”—powerful industries in both nations that feel threatened by greater trade—could prevail on their governments to impose retaliatory measures on trade. Finally, the powerful Pakistani and Indian media could take up the cause of smaller industries that suffer from trade liberalization. Given these risks, Husain concluded, it is essential that the trade relationship be carefully and proactively managed by both sides.
In his keynote address, Pakistan commerce secretary Zafar Mahmood offered a historical overview, underscoring how bilateral trade ties between Pakistan and India have often blossomed even while the political relationship wilted. In 1948-49, 56 percent of Pakistan’s exports were sent to India. For the next several years—a period of tense political relations—India was Pakistan’s largest trading partner. Between 1947 and 1965, the two nations entered into 14 bilateral agreements related to trade facilitation. This “spirit of pragmatism” was shattered in 1965, when the two countries went to war over Kashmir and trade became one of the conflict’s casualties. Commercial relations would lapse until 2011, when the Composite Dialogue process—launched in 2004 but suspended after the 2008 Mumbai terrorist attacks—was restarted, with trade one of the focus areas. Mahmood admitted that even with both sides now committed to ramping up trade, many in Pakistan’s private sector “remain unconvinced and deeply apprehensive” about transacting with India. Yet he rejected the notion that Pakistan’s security establishment is equally reluctant: “I can say with all honesty that during this normalization process, no one from the security establishment has ever contacted me to even discuss this issue.”
Pakistani businessman Amin Hashwani led off the afternoon panel by asserting that the present moment offered an historic window of opportunity for the two nations to move beyond the enmity of the past. Like Mahmood, Hashwani insisted that the Pakistani security establishment does not oppose increased trade with India. Indeed, according to Hashwani, it is New Delhi that remains preoccupied with its South Asian neighbor, as evidenced by Indian’s rising military budget and its force deployments along the Pakistan border. The rapid growth in trade between India and China, he declared, has convinced Pakistan that it is possible to achieve progress on economic issues even when important geopolitical differences remain unresolved. At the same time, he wondered whether the two sides were prepared to seize the opportunities now before them. India, as the larger economy, he declared, must take the first steps, particularly in the area of non-tariff barriers, so as to give Pakistan the courage to move forward. He also cautioned that the two sides must not allow their competition in Afghanistan to disrupt progress toward enhanced trade ties. Personal chemistry at the person-to-person level already exists, he concluded; the typical Pakistani and his or her counterpart in India are ready to forge a new relationship. It is up to the political leadership of the two sides, and most particularly civil society, to see that this opportunity is not lost.
Nisha Taneja declared that her analyses for the Indian Council for Research on International Economic Relations have convinced her that bilateral trade between India and Pakistan could easily reach $25 billion, nearly 10 times its current level. She first outlined some of the impediments to trade in the past—for instance, until quite recently trucks had to be offloaded at the border, their contents carried across to the other side, and then reloaded on trucks from the other country. Although “unprecedented” progress on bilateral trade has occurred recently, transaction costs such as bribes and non-tariff barriers such as cumbersome procedures and non-transparent regulations remain huge problems. The two countries must permit FDI (foreign direct investment) flows, address the infrastructure bottlenecks on each side of the border, and sensitize their respective media to the advantages of trade normalization. The youth of each country must also be brought into the process of change, she argued. Agriculture, textiles, pharmaceuticals and chemicals, IT, energy, and the entertainment sector are all ripe for expanded bilateral trade, she concluded.
The World Bank’s Kalpana Kochhar focused her remarks on the regional implications of increased trade between Pakistan and India. South Asia cannot take its rightful place in the Asian century without much greater regional integration, she asserted. Moreover, poverty and conflict are concentrated in South Asia today, and trade offers a powerful solution to both. Perhaps for this reason, she continued, the region has witnessed notable developments in regional integration in just the past two years, mentioning agreements linking India and Bangladesh, Nepal and India, Pakistan and Afghanistan, India and Afghanistan, and India and Sri Lanka. Yet the bilateral Pakistan-India link lags, as evidenced, for instance, in trade flows: nearly 10 percent of Bangladesh’s trade is with India, while for Sri Lanka the figure exceeds 17 percent. Yet only 4.2 percent of Pakistan’s trade is with India. Kochhar urged the two countries to move quickly to harvest “low hanging fruits,” by giving priority to a few transit routes as a means of building confidence, easing financial constraints that currently hamper trade, and increasing the frequency of air, rail, and bus services between the two.
While participants registered strong support for enhanced Pakistan-India trade, they did not hesitate to highlight the challenges. Several speakers spoke of the need to loosen visa restrictions, and of the broader imperative of a freer flow of people as well as goods. Husain noted that the mindset of customs officials in both nations continued to be one of suspicion, not facilitation. And Nabi emphasized the need for a much better cross-border banking system. Still, conference panelists declared that the reasons for pushing forward on trade are compelling, with immense potential payoffs for both sides—and beyond the region as well. As Mahmood stated, “Although the [trade] process between the two countries is bilateral, the entire world has a stake in peace in South Asia.”
Ijaz Nabi //Visiting Professor, Lahore University of Management Sciences, and Pakistan country director, International Growth Centre
Dean and Director, Institute of Business Administration (Karachi)
Commerce Secretary, Government of Pakistan
Founder, Pakistan-India CEOs Business Forum
Nisha Taneja //Professor, Indian Council for Research on International Economic Relations (ICRIER)
Executive Director, International Monetary Fund, and Affiliate Professor and Distinguished Senior Fellow, George Mason University
Chief Economist for South Asia, World Bank