The skirmishes between Pakistan and India in the wake of alleged killing of five Indian soldiers near the Line of Control (LoC) have brought the spotlight back on the bilateral trade relations. As the tensions grew, Finance Minister Ishaq Dar told television networks that the ‘government isn’t currently considering granting most favoured nation (MFN) trading status to India’.
This was contrary to the hope that the ruling Pakistan Muslim League-Nawaz (PML-N) would move quickly on the issue. After all, improvement in trade relations with India is one of the planks of the PML-N’s plan to revive the sliding economy that it announced in its election manifesto.
The previous government of the Pakistan Peoples Party had announced in early 2012 to grant MFN status to India by the end of that year. But it did not follow through on its decision because of impending elections and pressure from certain industrial and farm lobbies.
India’s failure to remove non-tariff barriers (NTBs) to ease the flow of Pakistani goods into its territory was also a major reason for Islamabad’s reluctance to grant MFN status for its next-door neighbour.
Now, it appears that the tensions on the border and approaching elections in India will further delay trade liberalisation between the two countries, reversing the significant development achieved in 2011 and 2012, when many measures, like the liberalisation of the visa regime, moving away from the positive list to the negative list, opening doors of investment, developing physical infrastructure and enhancing customs cooperation, etc. were taken.
The normalisation of trade will see the implementation of the South Asia Free Trade Agreement (Safta) with zero tariff rates in 2016. The negative list was also to be phased out by the end of last year, but was delayed because of India’s refusal to remove NTBs to ease the concerns of Pakistani manufacturers of automobile and auto parts, pharmaceuticals, etc.
‘It will be unfortunate if the trade liberalization is suspended or stalled because of the recent developments across the LoC,’ a Lahore-based businessman said. He conceded that Dar’s statement on MFN status for India amidst escalation of tensions across the LoC was unnecessary, and represented the fragility of the bilateral trade relations.
‘Trade is an instrument to help create an understanding and goodwill for resolving the outstanding bilateral political, territorial and other issues. It was the realisation of the importance of this factor that the governments of the two countries had resumed trade talks in early 2011, and moved quickly to normalise trade to raise the volume to $6 billion in five years,’ he argued.
The two-way trade volume has increased to about $2 billion in 2011-12, from $835 million in 2004-05. The size of trade held through third countries is estimated to be many times greater than that done through official channels.
Some estimates suggest that bilateral trade could reach $10 billion in a few years, if business relations normalise between the two nations.
In a recent study, the World Bank has also asked Islamabad to open up trade with India, among other things, to avoid a looming second balance of payments crisis in five years. In an economic memorandum ‘Pakistan: Finding the Path to Job-Enhancing Growth,’ the Bank points out that ‘in the short-term, removing distortions and completing India’s normalisation process has promising growth potential. Tangible improved customs and logistics procedures at the Wagah border could deliver a visible demonstration effect’.
While the border hostilities are a setback for Indo-Pak trade relations, many say poor trade infrastructure and logistics are major hurdles to trade expansion between Pakistan and India. Both the countries have signed different agreements for improving trade infrastructure, but haven’t implemented them wholeheartedly, says a customs official at Wagah.
Inadequate infrastructure and logistics severely affect trade potential.
Railway services, for example, have deteriorated, even though trade volumes have increased,’ said Aftab Vohra, former vice president of the Lahore Chamber of Commerce and Industry.
‘Indian wagons are not plying since 2009. Only Pakistani wagons have been carrying cargo,’ he added.
‘Insufficient infrastructure and logistics are a kind of non-tariff barrier imposed by the two countries. Upgradation of infrastructure at Wagah-Attari is also required to keep pace with the expanding trade,’ said Vohra. Although the new integrated check post has been set up on the Indian side, it is already running at full capacity. When the existing permissible list of goods to be imported to Pakistan by road expands, the facility will not be able to handle increased trade volume.
Warehousing facilities are also lacking on both sides, and the testing laboratories are not present at land ports.
A study titled ‘Trade of Industrial Goods with India: Opportunities and Challenges for Pakistan,’ says that enhanced trade with India can bring substantial benefits for the industrial sector in Pakistan, including building valuechains, savings on freight and lower prices for consumers and access to a large market.
Further benefits include improved infrastructure, creation of employment and improved utilisation of resources.
‘Direct industry contribution and empirical evidence suggests that opportunities for exports would increase worldwide.
Even those industries in Pakistan that are likely to be put at a disadvantage, will have opportunities for sustainability and growth in the long run, if managed trade is appropriately negotiated,’ the study says. It dispels the impression that Pakistan’s import bill will be adversely affected by normalisation of trade with India.
However, it says that the trade balance may continue to remain in India’s favour, or even increase substantially.
The study suggests that Pakistani manufacturers have to come out on the front foot and actively seek mergers and joint venture opportunities with their Indian counterparts.
As Pakistan and India increase their volume of bilateral trade, land border stations such as the Wagah-Attari border are expected to become major trading hubs, especially due to lower freight costs. Therefore, greater focus has to be placed on trade facilitation measures such as different standards, customs valuation and non-transparent application of trade defence measures, not only at the border, but also beyond the borders, it suggests.
We can only hope that the governments of the two countries will not let anything come in the way of prosperity of their people and growth of their economies.