It is a million dollar question. For a long time the political will to grant Most Favoured Nation (MFN) status to India was not there. At that time, industrialists, traders and civil society activists advocated increasing trade with India, saying this would be a great way to forge better relations and solidify peace overtures between the two nations.
Now the political will is there, but industries and businesspersons are divided on the issue. Those in favour of MFN say that the quantum of trade between the two countries can be increased exponentially if this step is taken and the negative list – the list of items that cannot be traded between the two countries – is phased out. Currently the trade volume between India and Pakistan is about $2.5 billion and it is expected that this can be enhanced to $8 billion in the next two years.
It is, however, obvious that the bulk of this trade will be in favour of India. It is also obvious that this will not be just because India is a much bigger economy.
India has one of the most restrictive trade regimes in the world, according to the World Trade Organization (WTO). According the 2006 WTO annual report, in 2005-06, India initiated 191 safeguard actions compared to just 171 by China, a much larger economy. In fact, this was even higher than the number of actions initiated by the EU, also a much larger economic bloc.
And a new study conducted by the United States Agency for International Development (USAID) has revealed that India stands at the top in South Asian countries on the basis of trade restrictions imposed on neighbouring countries, according to criteria set by the World Bank. India is accused of using both tariff and non-tariff barriers to discourage imports from neighbouring countries.
It is no surprise, then, that trade between India and Pakistan is so skewed right now. The volume of trade is growing, but not in a way that seems to be of any real benefit to Pakistan. In 2006-07, Pakistan exported goods worth $342.9 million to India, against imports of $1.24 billion. In 2010-11, Pakistan’s exports to India had dropped to $264.3 million, while imports from India had surged to $1.74 billion.
The measure is more than likely going to go through this year. Trade with India is also going to grow, exponentially if this measure goes through, and still very fast even if it does not. There are benefits for both sides: Pakistan can target the huge retail market in India and also substitute cheaper imports with imports from India. The potential import items include tea, spices, auto parts, consumer and light engineering goods, tires and transport equipment, entertainment, healthcare, information technology, and pharmaceuticals. This can mean potential savings of up to $1bn for Pakistan.
On the other hand, Pakistan will have to be mindful of the pitfalls of allowing completely unfettered and unhindered imports from a much larger and much more developed economy. The USAID report suggests that Pakistan should actually enhance the sensitive list to protect the local industry and agriculture sector following granting MFN status to India.
This year will see some major shifts, with some local industries having to suck it up and see the end of their life inside the bubble of protectionism. This will bring benefits for the local consumer, who will have access to more choices and cheaper products.
But it will also bring in threats to other industries which do not have the same benefits, or are as developed as their counterparts in India.
Last, but not least, India will have to reciprocate tangibly in removing barriers to trade to provide an equal benefit to Pakistani exporters. Moving ahead on this measure, simply to please lobbyists who want liberalisation at all costs, could be fatal for Pakistan’s economy.
Published in The Express Tribune, January 7th, 2013.
Like Business on Facebook to stay informed and join in the conversation.
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ