Peer reviewed analysis from world leading experts

India-Pakistan trade breakthrough?

Reading Time: 4 mins

In Brief

Why do India and Pakistan trade so little with each other despite the existence of a common history, language and culture, as well as a long common border?

Theory would predict that trade between the two largest economies in South Asia would be much greater than its current level of around US$2 billion per year.

Share

  • A
  • A
  • A

Share

  • A
  • A
  • A

While both sides are aware of the merits and advantages of trade, a variety of political and infrastructural (physical, legal and regulatory) impediments have paralysed bilateral trade relations between the two neighbours for several decades.

Despite this history, after several false starts, a major breakthrough started to take place in 2011. During the course of the year, Indian and Pakistani officials had several high-level meetings aimed at improving trade relations: the respective secretaries of commerce met twice (in April and November) and the ministers of commerce met in September in Mumbai. The two countries’ prime ministers also discussed trade issues at the 17th South Asian Association for Regional Cooperation Summit in the Maldives in November. And in early February 2012, the Indian commerce minister, accompanied by a delegation of Indian business leaders, visited Pakistan to continue discussions.

On 2 November 2011, the Pakistani government announced it was ready to grant most favoured nation (MFN) status to India. The cabinet’s decision is a turning point in trade relations between the two countries, and finally fulfils Pakistan’s obligations as a member of the WTO.

Following its earlier decision and the visit of the Indian commerce minister, Pakistan’s cabinet announced on 29 February this year that the MFN with India would become operational in 2013. In the interim, the positive list of items that can be imported from India will be increased from 1946 items to nearly 5600 (covering some 90 per cent of the items India normally exports). By the end of 2012, this positive list will be replaced by a small negative or ‘sensitive’ list of items that will still be restricted. All other items will be governed by the MFN requirements. Despite some protests from hardline nationalists against granting MFN status to India last November, Pakistani business people, as well as the Indian foreign and commerce ministers, have all welcomed this decision.

By itself the granting of MFN status will not lead to the levels of trade that India and Pakistan should have with each other. It is expected there will be a jump in trade as unofficial trade between the two countries going through Dubai can take place directly through official channels. So some sizable increase in trade in the short run is very much on the cards. This will be especially important for Pakistan as it confronts diminishing marginal returns to those sectors which have traditionally fuelled growth. Pakistan is in need of larger and growing export markets so that it might tap the potential of industrial hubs in the country’s south and west (including the Baluchistan coastline and Karachi), in the central belt (Multan, Lahore, Gujrat, Gujranwala and Sialkot) and in the north (in cities like Peshawar).

But if the Pakistani government is to achieve its goal of doubling the country’s standard of living every 10 years and providing jobs for the rapidly expanding labour force, the economy must sustain long-term annual growth rates of at least 7 per cent — and not simply depend on these short-term benefits. Pakistan’s economic development will not only depend on promoting equitable growth within all provinces and regions of the country, but also on normalising relations with India. This in turn will pave the way for greater regional economic integration throughout South Asia.

The complete liberalisation of trade between India and Pakistan will be a long and arduous process, but Pakistan’s granting of MFN status to India is a good start. Higher levels of trade will benefit both countries, and Pakistan more so than India — although increased trade with Pakistan will also help facilitate India’s trade with China, Iran and Central Asia. Indeed, with India cementing its position as the region’s engine of growth, Pakistan must hitch its wagon to the locomotive or risk getting left behind. The Pakistani government, and perhaps also the supposedly ‘India-centric’ military, is finally coming to recognise and accept this reality. As such, there is now considerable optimism on both sides of the border that increased trade could at last provide the two neighbours with an opportunity for better overall relations.

Mohsin Khan is Senior Fellow at the Peterson Institute for International Economics, Washington, DC.

Comments are closed.

Support Quality Analysis

Donate
The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (https://www.eastasiaforum.org)

Copyright ©2024 East Asia Forum. All rights reserved.