Bilateral crises and trade bottlenecks notwithstanding, Pakistan and India need to find ways to continue to do business

If ever a reminder was needed of the slippery nature of the grounds on which India-Pakistan relations are played out, a most recent offering is the Washington-based Wilson Center study on India-Pakistan trade. Fairly up to speed on bilateral relations, by recording developments as recent as November 2012, the study has already been rendered outdated by the subsequent turn of events. Still, it remains relevant as it reiterates a well-known and acknowledged fact — that the two countries need to find some way to do business, crises notwithstanding.

The atmospherics have changed considerably since the Asia Centre of the Wilson Center co-hosted a conference on India-Pakistan trade along with the Karachi-based Fellowship Fund for Pakistan in April 2012. The presentations made at the conference have now been put together as a study called “Pakistan-India Trade: What needs to be Done? What Does it Matter?”

Bilateral relations have gone south since the conference and the momentum that had been gained on the trade diplomacy front has lost pace; the hope that was driving it this time last year. Pakistan is yet to accord Most Favoured Nation (MFN) status to India. By all indications, that is not going to happen till midyear as Pakistan is now in election-mode. That is a six-month delay over the schedule announced in 2012.

MFN status

Though bilateral relations took a drubbing after the clashes along the Line of Control and subsequent media-induced loss of appetite for improving relations with Pakistan in India, the Pakistan Peoples Party-led coalition government maintained till its last day that, despite the delay, the country was steadfast in its commitment to granting MFN status to India.

In fact, barring the religious right wing groups, all mainstream political parties of the country agree on this.

The reasons for pushing forward on trade, as Michael Kugelman, one of the editors of the study, puts it are “compelling with immense potential payoffs for both sides.” But equally compelling, at least for the naysayers, are the concerns that are stalling the process.

Much of these, according to some of the contributors to this study, stem from a lack of proper information about developments in either country on addressing, in particular, the Non-Tariff Barriers (NTB). Such being the case, Arvind Virmani, who was executive director at the International Monetary Fund till 2012-end, stresses the need to make the positives known as the “negatives will always be blown up” by the media. “This is not a question of biasing one’s conclusions. It is just working to make the facts known to everybody so that people can make informed judgments.”

Direct trade

As a case in point, he flags the “pure deadweight loss” from India-Pakistan trade that is going through third countries. “Once this trade takes place directly between the two countries, instead of transiting third states, we should see a visible improvement, because this is going to be a shared benefit.”

This is borne out by a survey conducted in 2005. Nisha Taneja, professor at the Indian Council for Research on International Economic Relations, shows in her presentation that the transaction costs involved in trading through a third country, for example the Mumbai-Dubai-Karachi route, was 1.3 to 1.7 times that of the Mumbai-Karachi route. Needless to say, much of the stuff that travels in and out of the two countries through Dubai are those outside the positive list on which trade was allowed till Pakistan switched to a negative list approach last year.

But, in terms of efficiency (transaction costs incurred per container per kilometre between direct and indirect routes), Ms Taneja concluded that the Mumbai-Dubai-Karachi route is 2.6 times more efficient than the direct Mumbai-Karachi route, primarily because of systemic bottlenecks in bilateral trade.

While stressing the need to keep expectations from bilateral trade realistic — at least, in the short term — Ishrat Hussain, Director of the Institute of Business Administration at Karachi and former Governor of Pakistan’s central bank, the State Bank of Pakistan, seeks to address a major concern among Pakistani businessmen of being swamped by Indian goods by drawing a parallel with China. “With the signing of the free trade agreement with China in 2006, Pakistani markets and producers have already adjusted to relatively cheaper imports from China,” is his submission.

Quality standards

What emerges in his paper is that some of the concerns of Pakistani businessmen actually arise from poor implementation of quality standards in Pakistan.

This is particularly the case with the pharmaceutical industry which not only fears being squeezed out by cheaper Indian variants but also drugs of dubious quality entering the market due to laxity in enforcement of standards. Since quality control measures in Pakistan are not too stringent, the pharma industry wants arrangements in place to apply the same quality standards effectively to Indian products as India has for Pakistani products.

Providing an insight into the thinking that went into Pakistan’s decision to open up trade with India, Zafar Mahmood, who as Commerce Secretary steered the process into top-gear, also dwells at length on the trading links that existed till the 1965 war. He draws attention to the historical fact that signatories to the General Agreement on Tariffs and Trade, which was being negotiated around the time of Partition, took into account that the subcontinent was a single economy and allowed a special dispensation for India and Pakistan. Today, thanks mainly to these two countries, South Asia, despite its historical and cultural linkages, is the least integrated of all regions in the world.

A recurrent thought among the Pakistani contributors to this study is also echoed by Mr. Mahmood when he states that because of “its dominant economic position, India needs to be large-hearted and more accommodating” towards its neighbours. “Granting trade concessions to its smaller neighbours would not hurt it economically. It would not only earn goodwill and respect for India in the region, but would also contribute to the economic integration of South Asia.”

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