Will Pakistan and India Revive Trade?
Introduction
The recent visit of Indian Minister for External Affairs, S. Jaishankar, to Islamabad on October 15-16 for the Shanghai Cooperation Organisation (SCO) meeting has sparked hopes of a potential thaw in the long-frozen economic relations between India and Pakistan. This trip, though not a bilateral one, marks the first visit by a senior Indian leader since Prime Minister Narendra Modi’s impromptu visit to Lahore in December 2015. This article explores the historical context, current state, and future prospects of trade between the two South Asian neighbors.
Historical Context of Indo-Pak Trade Relations
Early Trade Relations
At the time of Pakistan’s independence in 1947, India was its largest trading partner, accounting for approximately 70% of Pakistan’s global trade. Both countries became members of the General Agreement on Tariffs and Trade (GATT) in 1948 and granted each other Most Favoured Nation (MFN) status. Contrary to its name, MFN status implies a normal trading relationship without special privileges. However, the 1965 war disrupted this relationship, leading to a suspension of trade until 1973.
Post-1973 Trade Dynamics
Trade resumed in 1974 under a ‘positive list’ system, allowing only specified items to be traded, which significantly curtailed the volume of trade. The World Trade Organization (WTO) replaced GATT in 1995, retaining the MFN principle. India restored MFN status to Pakistan in 1996, but Pakistan continued to restrict trade with India through a positive list, which was later replaced by a ‘negative list’ in 2011. This negative list allowed all products to be imported except for those explicitly listed, signifying Pakistan’s intent to normalize trade.
The Shift to Geoeconomics
Pakistan’s recent strategic shift from geopolitics to geoeconomics aims to prioritize economic interests over political and military conflicts. This shift, coupled with Jaishankar’s visit, has generated optimism about the potential revival of trade relations between Pakistan and India, the two largest economies in South Asia.
Barriers to Trade
Non-Tariff Barriers
Despite the strategic shift, several barriers hinder the normalization of trade. India’s non-tariff barriers (NTBs), such as tariff rate quotas, stringent customs procedures, and trade defense measures like anti-dumping duties, pose significant obstacles. These barriers are particularly stringent for textile and agricultural products, which are crucial to Pakistan’s exports.
Sensitive Lists under SAFTA
Both countries are members of the South Asian Free Trade Agreement (SAFTA), which mandates preferential tariff treatment. However, their Sensitive Lists, which include products exempt from tariff concessions, further restrict trade. India’s list includes 614 tariff lines, with 182 related to textiles and clothing and 139 to agriculture, sectors vital to Pakistan’s economy.
The Impact of Political Tensions
Pulwama Incident and Article 370
The bilateral trade faced a severe setback following the Pulwama incident in February 2019 and India’s subsequent revocation of Pakistan’s MFN status. The situation worsened when India unilaterally abrogated Article 370, revoking the autonomous status of Jammu and Kashmir in August 2019, leading to a complete halt in trade, except for essential goods like pharmaceuticals.
Economic Implications of Trade Revival
Trade Deficit and Consumer Benefits
Pakistan’s significant trade deficit with India has been a major concern. In 2018, Pakistan’s exports to India were valued at $385 million, while imports stood at $1.9 billion, resulting in a $1.5 billion trade surplus in India’s favor. While concerns about cheaper Indian goods flooding the Pakistani market are valid, these goods can benefit Pakistani consumers by providing affordable options. Moreover, cheaper intermediate goods and raw materials from India can benefit Pakistani businesses.
Market Access Challenges
India, due to its larger economy, has a cost advantage in production. However, its high tariffs, particularly on textiles, clothing, leather products, fruits, vegetables, and cereals, pose significant challenges for Pakistani exporters. Indian tariffs on these products can exceed 100%, making it difficult for Pakistani goods to compete.
Prospects for Trade Normalization
Potential Benefits
Reviving trade between Pakistan and India could have several benefits. For Pakistan, access to one of the largest markets in the world can boost its exports. For India, access to Pakistan’s market can open up new opportunities for its businesses. Trade normalization can also foster regional economic integration, contributing to overall economic stability in South Asia.
FAQs
1. What is the current state of trade between Pakistan and India? Trade between Pakistan and India is currently at a standstill, with only essential goods like pharmaceuticals being traded sporadically.
2. What are the main barriers to trade between Pakistan and India? The main barriers include political tensions, non-tariff barriers, and high tariffs on crucial export items from Pakistan.
3. How does the South Asian Free Trade Agreement (SAFTA) affect trade between the two countries? SAFTA mandates preferential tariff treatment, but both countries maintain Sensitive Lists that exclude several items from tariff concessions.
4. What was the impact of the Pulwama incident on Indo-Pak trade? The Pulwama incident led to India revoking Pakistan’s MFN status, followed by a complete halt in bilateral trade after India’s abrogation of Article 370.
5. What are the potential benefits of reviving trade between Pakistan and India? Reviving trade can benefit both countries by providing access to larger markets, boosting exports, and fostering regional economic integration.
Conclusion
The possibility of reviving trade between Pakistan and India remains uncertain due to enduring political tensions. However, the recent visit of S. Jaishankar to Islamabad has sparked hope for a potential thaw in relations. If both countries can overcome their differences and address the existing barriers to trade, they stand to gain significantly from renewed economic cooperation.
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