It’s About Time India and Pakistan Prioritized Trade

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Rivals from World War, France and Germany are today top trading partners. Till last year France was Germany’s biggest export destination. Brazil, despite a history of political hostility with Argentina, is both the former’s principal export destination and import source. While these two examples reinforce the logic of neighbors being natural trade partners, two countries in Asia fail to see logic. Trade relations among two of South Asia’s infamous geopolitical adversaries, India and Pakistan remain hostage to political bickering to this day. Ironically, at the time of independence, presumably the time around which political tensions started to build up (only to be allowed to escalate over the years by governments on both sides of the disputed border), India accounted for 70% of Pakistan’s trade.

Today, Indo-Pak trade amounts to a roughly $2.5 bn even as China, with whom India has vital border disputes and has also fought a bitter war with, has become one of India’s top trading partners, with bilateral trade poised to touch $100 bn by 2015. India’s bilateral trade potential with Pakistan is estimated to be anywhere between $10 and $40 bn. But, currently trade volumes are bizarrely low for two neighboring countries as India accounts for 3% of Pakistan’s total trade whereas Pakistan makes up less than a percent of total Indian trade. While these are official figures, informal trade between the two continues unabated and has in fact shot up over the years. By some accounts, informal trade is considerably larger than the size of formal trade. If the Pakistani government would see reason, they would move away from the negative list, switch to trading in all tradable goods and eliminate tariffs therein, while maintaining some level of protection for its sensitive constituencies. By most of the total trade being outside the purview of formal trade relations, both governments lose out a significant revenue stream.

Pakistan has refused to grant India Most Favored Nation (MFN) status even though it is the standard procedure under WTO to grant each other MFN status when countries sign free trade agreements (India and Pakistan are part of SAFTA, the free trade agreement among the SAARC member countries). Very recently Pakistan’s commerce minister went on record to say that India was not being considered for MFN status. India on its part had granted Pakistan MFN status back in 1996. Till as recently as 2012, Pakistan maintained a positive list of some 137 importable items to be traded via the road route out of a total of 1946 importable items. Considering that the overland route is the cheapest transport for trade, the restriction was harmful to say the least. But despite trading on a positive list, India managed to consistently record a trade surplus vis-à-vis Pakistan. Currently Pakistan has a negative list of items, a regime that does harm to all stakeholders – the government, traders and even the consumers, who pay a higher price for goods thanks to additional transport costs arising out of informal trade routed via third country ports like Dubai. India on its part allows import of all goods from Pakistan except a list of goods that it bars from being imported from all countries.

This is not to say that India has been the benevolent partner and Islamabad has to shoulder all blame for such abysmally low trade ties between the two countries. India, for instance, maintains high non-tariff barriers. Furthermore, Pakistan has complained of lack of meaningful market access for its goods in India urging the latter to lower duties on around 300 goods including textiles and cements, goods that Pakistan have a strength in.

While India and Pakistan continue to maintain relatively high tariffs, non-tariff barriers have become a growing problem for trade in SAARC in general and particularly for Indo-Pakistan trade. For one, the infrastructure on the border is ill-equipped with a lack of storage and warehousing facilities, and the near absence of labs at the border for quality checks, the reason for unwanted delays in passing of goods. Other technical barriers include outdated custom procedures like manual entries, and a disparity in goods’ labelling codes. India and Pakistan should urgently go ahead and homogenize custom procedures and also standardize quality requirements, if trade – i.e. formal trade – is to pick up. If trade is prioritized and the impediments to trade – including the mindset-related ones – are removed, relations might eventually normalize as countries with high commercial stakes in each other are less likely to enter into conflicts at the drop of a hat.

At around $2.5 bn, India’s trade with Pakistan is well behind the $4.5 bn worth of trade that it conducts with Sri Lanka, its neighbor down south, an island country approximately 1/9th Pakistan’s population and 1/4th Pakistan’s GDP. That by itself is an indicator of the crippling effect political acrimony currently has on Indo-Pakistan economic relations.

Abhirup Bhunia is a Research Analyst with the Institute of Economic Growth, New Delhi. He holds a Master’s in International Political Economy from the University of Sussex, UK.