There is political will to open up trade between India and Pakistan but Islamabad needs to assuage the concerns of certain sectors. It also needs to be vigilant so that non-state actors do not disrupt the process By Farooq Baloch in Karachi
Bilateral trade between India and Pakistan has increased significantly because of recent collaboration and has the potential to reach $6 billion in another two years. There are signs of support for reinvigorating the process from the military establishment on either side of the border but the road is filled with hurdles.
The recent skirmishes along the Line of Control (LoC) – de facto border in Kashmir claimed by both countries – show there are elements on both sides that do not want the two countries to have normal relations, director of the Islamabad-based think tank Jinnah Institute, Raza Rumi, said. “However, bilateral trade between the two countries has increased by a third, which indicates that there is some support, at least for economic relations, from the establishment,” he added. In fact, if the recent LoC crises didn’t take place, the two countries would have fully opened their markets for one another by now, Rumi felt. The analyst, however, added they (read establishment) would like to restrict it to economic relations only, as evident from the LoC crises.
The relations between the two countries soured again in January and February this year after soldiers from both sides were killed in exchanges along the border in Kashmir. This happened just when the leadership on both sides of the border showed their willingness to carry the peace process forward.
Over the past few decades, many countries have integrated themselves into regional economic blocks, creating new trade flows and bringing prosperity and peace to their regions, the Geneva-based consultancy firm World Trade Advisors reported in a study titled ‘Pakistan India Trade Normalization: Opportunities and Challenges for Pakistan’.
In contrast, the trade liberalisation process between India and Pakistan – the largest and second largest economy of South Asia respectively – has been in fits and starts, thereby depriving the region of the benefits of economic integration.
Frequent skirmishes along the LoC and incidents, such as 1999 Kargil War and 2008 terror attack on the Indian financial capital of Mumbai, had put the idea of trade normalisation on the back burner for a decade.
In 1995, after India and Pakistan joined the World Trade Organization (WTO), New Delhi immediately awarded most favoured nation (MFN) status to Islamabad – an obligation for WTO signatories requiring them to award MFN status to all member countries. However, Pakistan is yet to reciprocate by giving this status to its eastern neighbour.
A major breakthrough came when negotiations between the arch-rivals resumed in 2011 and they held two rounds of talk focusing largely on trade and visas. Pakistan even announced the abolition of the negative list of untradeable items by December 2012. But Islamabad’s attempt to normalise trade in absolute terms didn’t materialise because of New Delhi’s failure to address Islamabad’s concerns regarding non-tariff barriers. Opposition from automobile and pharmaceutical sectors of Pakistan also contributed to this.
The leadership on both sides of the border have taken several steps towards trade liberalisation. They have signed three bilateral agreements last year in the areas of customs cooperation, mutual recognition of standards and addressal of trade grievances.
India eased its visa policy for Pakistani businessmen while Islamabad replaced a positive list of 1,956 tradable goods with a negative list of 1,209 untradeable goods, further opening the market for Indian goods.
These measures helped the two countries increase their trade volume. According to a statement by the Indian High Commission in Islamabad, bilateral trade reached $2.4 billion between April, 2012 and March, 2013. This translates to a year-on-year increase of 21 per cent.
Pakistan’s exports to India increased 28 per cent to $513 million – which is more than the combined trade volume these two countries had in fiscal 2004. India’s exports to Pakistan increased by 19 per cent to $1.8 billion, the IHC statement said. If trade through third party is avoided, the two neighbours could boost the bilateral trade to $6 billion by March, 2015, the statement said.
Open trade with India is in the country’s interest, say experts. But Islamabad will face fierce opposition from certain sectors of the economy if it moves in this direction, the biggest being the automobile sector.
The automobile manufacturers in Pakistan argue that Indian cars of the likes of Maruti Suzuki, for example, will outperform their Pakistani counterparts as they are not ready for competition, according to Muzammil Aslam, an economist and MD of Emerging Markets Research. The automobile manufacturers are, however, likely to support trade in spare parts, which will save them some money on imports from other expensive destinations.
The pharmaceutical sector will be another opponent as it fears competition from Indian medicines which are cheaper and are of good quality. They, however, support the idea of open trade of raw material, which can be cheaply imported from India.
As opposed to the country’s pharma lobby, some established players in the pharmaceutical sector support open trade even in medicines. Getz Pharma feels that open trade with India can increase Pakistani exports manifold and even help Pakistani medicines reach the European Union and the Americas through joint ventures with Indian companies.
While some sectors have problems, others welcome the move. The cement sector favours it because the country is self-sufficient in this area. Similarly, Pakistan has an edge over India in the leather and carpet industry, Aslam, the economist said. The engineering sector will also welcome the move, for they can import cheap raw materials from India.
It may be added here that there is a total indicative potential of $2.13 billion for products in which Pakistan has a positive net revealed comparative advantage over India, according to WTA study. The study says that major manufacturers are of the view that if all tariff and non-tariff barriers are removed, their exports of major products could exceed $3.7 billion.
These estimates included raising of export of cement to over $1 billion, textiles to over $1.5 billion, light engineering goods (surgical, fans, sports goods, cutlery, etc) to $200 million, chemicals to over $200 million and agricultural products to over $800 million.
While there may be clear proponents and opponents of free trade with India, the case of textile and agriculture sector is different, according to Aslam. These are two major sectors where both countries have their own advantages and disadvantages, he said.
Textile has many sub categories, Aslam said. In this area, both the countries mainly compete in export markets, such as the EU and the US, and not locally. “In some areas, they have the advantage while in others, we are strong,” he said.
India has the advantage in apparels and ready-made garments while Pakistan has the edge in categories like knitted linen, Aslam said.
Agriculture is one sector where if one country runs short of supply, the other can benefit from it. “If India runs short of tomatoes, they have the ability to import the entire tomato produce of Pakistan,” he said.
In the long run, Pakistan will benefit from open trade in agriculture sector, said Waheed Ahmed, a leading exporter of fruits and vegetables in Pakistan. “Our agriculture is underdeveloped and afraid of competition. Once Indian goods compete with ours, we will need to develop ourselves and benefit in the long run,” he said. Ahmed, however, said there has to be a level-playing field. “For example, we have been trying to export Kinnos to India for the last two years but are unable to get permit,” he said. “If we get market access, we get a bigger market of over one billion people.”
As things stand today, there is no better time to go for open trade than now. While there may be some opposition from certain lobbies, experts say that Islamabad is in a position to award MFN to India.
“The lobbies opposing open trade with India are smaller than those in favour of it,” according to Rumi. “Non-state actors or right wing groups can’t sabotage the process because all the major political parties and public opinion are in favour of open trade with India,” he said.
But if history is any pointer, non-state actors and right wing groups have always punched above their weight when it comes to jeopardising the Indo-Pak peace process.
(The writer is business correspondent for The Express Tribune, Pakistani affiliate of the International New York Times)