A win-win trade for India & Pakistan

Abid Suleri, Pradeep S Mehta

Both Pakistan and India are members of the World Trade Organisation and also of the South Asia Free Trade Agreement. The WTO agreement requires each member state to grant Most Favoured Nation status to all other members to facilitate smooth trade flows. SAFTA takes up closer economic cooperation among all member states of SAARC. Alas, in the case of Pakistan and India there are several bottlenecks in achieving a harmonious trade relationship in spite of both the agreements. Why should the status remain status quo, when both will gain hugely.

The intra-regional trade in South Asia has been relatively low, owing much to the geo-economic dynamics as well as other factors, and not merely the existing tariff regimes. Some of the impediments to low regional trade include high transaction costs, limited port and transport infrastructure, and—crucially—the lack of political will. The intra-regional exports in South Asia stand at an estimated $9.3 billion as compared to a huge $2,96 billion of intra-EU exports and $193.8 billion of intra-ASEAN exports.

In 2010, the bilateral official trade between Pakistan and India stood at an estimated $1.83 billion. India accounts for approximately 1.2% of Pakistan’s global exports, while Pakistan accounting for less than 0.9% of India’s global exports.

In an ongoing study on costs of economic non-cooperation in South Asia by CUTS, Jaipur, and SDPI, Islamabad, and other partners, supported by The Asia Foundation, it was found that annual welfare gains to Indian consumers by importing certain products from Pakistan would be around $4 billion and similarly importing certain products from India would benefit Pakistani consumers by $280 million. Considering the population of Pakistan at 17.8 million, this would translate to $15.73 per person, and for the 1.2 billion people in India it would mean a gain of $3.30 per person, annually. The big figures apart, the gain to Pakistan would be nearly five times that of India.

The gains can come from areas such as farm goods, automobile spare parts and pharmaceuticals. For instance, India enjoys such advantages in cotton, textiles, coffee, tea, spices, man-made fibres and vegetables products. This will also help in increasing the level of intra-industry trade between the two countries, which stands at a low level despite geographical contiguity and cultural affinity.

The recently concluded visit of Pakistan’s commerce minister Makhdoom Amin Faheem to India has given a strong boost to the business community, especially in terms of confidence building. The 80-member Pakistani business delegation, which represented 26 sectors of the economy, was an effort towards a more broad-based and deeper engagement.

India has global competitiveness in production and export of services. India’s global services export accounts for $109.5 billion as compared to Pakistan’s $2.7 billion as of 2010. The potential for bilateral cooperation exists in several services sectors including IT and IT-enabled services, telecommunications, professional services (including architecture, construction and engineering), healthcare services, audio-visual services and cinema, higher education and tourism. Service trade accounts for more than half of the GDP in most South Asian countries and the region is emerging as a major exporter of commercial services worldwide. Tragically, services continue to be out of SAFTA.

Owing to high trade costs, an estimated $3 billion of informal trade happens between the two countries, which also breeds corruption. This trade can be brought into the mainstream economy through better trade facilitation measures.

The economic integration need to be seen in a larger perspective by aligning SAFTA with ASEAN, thus having ASEAN as a partner in the east, and the Economic Cooperation Organisation Trade Agreement (ECOTA), which comprises of Afghanistan, Pakistan, Turkey and Central Asian republics, in the west.

It is important for both sides to implement all mutual obligations under SAFTA. This would help create an enabling environment for engagement. Pakistan continues to maintain a long sensitive list currently covering 1,169 items, which needs to be pruned. Further, steps need to be taken for the removal of non-tariff barriers.

The announcement by Pakistan’s commerce secretary that petroleum products from India will not be on the negative list will eventually lead to a new chapter in bilateral trade. India has high global competitiveness in petroleum products, being the largest exporter in Asia and accounting for an estimated average of one million barrels of petroleum products exports per day.

The two sides recently discussed the issues of investments and joint ventures in New Delhi with lot of optimism. We need to wait and watch for some decisions on this issue, which can have pragmatic implications for business. However, it is pertinent to note that opportunities for investment cooperation do exist in the areas of agriculture and food, small businesses, manufacturing, electricity, trade-related infrastructure, and oil and gas. The two sides have already agreed to constitute expert groups on energy and petroleum.

On the issue of grant of MFN status to India, there is some hope. The Pakistani business delegation has raised a strong voice in favour of removing this anomaly, and possibly such views can be taken up further during successive negotiations. Even during the visit of the Indian commerce secretary to Pakistan in August this year, this issue was discussed and Islamabad agreed to put it on the agenda. Interestingly, the MFN status for India would pave the way for deepening not merely the trade ties but the whole gamut of cooperation in a geo-economic perspective. But it should be done sooner than later.

In successive negotiations at high level, an important matter of concern should be trade facilitation measures which presently include stringent customs and other administrative procedures. Also, the lack of attention towards adequate transport-related infrastructure development is taking its toll, leading to increased freight and time costs. These non-price trade costs are largely hindering the movement of trading commodities, especially those traversing through the much desired Wagah-Attari land route.

The energy supply routes especially the gas pipeline is a vital economic as well as a strategic necessity for both the countries for procuring a cost-effective natural gas supply. The failure to build common minimum consensus has already left the Iran-Pakistan-India (IPI) gas pipeline in a limbo. It is now up to the two governments, at the level of both commerce and diplomacy, to negotiate the newly-proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, and prevent another such fiasco. This pipeline would help both India and Pakistan secure their natural gas supplies. The signals given by Pakistan’s minister toward the strategic importance of ECOTA can well serve this purpose.

Though the complexity factors historically attached to such interactions are deemed to continue, yet we are seeing an increasing realisation of the need for mutual co-existence and interdependence between the two countries. And this is what is the need of the hour. It is in the best interest of both sides to understand that this bilateral engagement is but a national necessity. Therefore, the two countries need to revisit their global repositioning in order to jointly play a pivotal role in evolving both the South Asian geo-econo- mics and also envision the evolution of the Asian Economic Community.

Pradeep S Mehta is Secretary General, CUTS International, Jaipur, India. Abid Suleri is Executive Director, Sustainable Development Policy Institute, Islamabad, Pakistan.

Faisal Ahmed, Associate Director of CUTS, and Shafqat Munir, Editor of INFN, Pakistan, contributed to this article