Removing the Trade Barriers
Trade relations between India and Pakistan may be governed by political disputes. But there is light at the end of the tunnel.
It may come as a surprise to many, especially those who were born after 1970, that Pakistan and India were the major trading partners soon after independence. In 1948-49, 56 percent of Pakistan’s total exports were destined for India and 32 percent of its total imports were from India. Both countries enjoyed normal trading relations till 1965 and used a number of land routes for bilateral trade. These included eight customs stations in the Punjab at Wagah, Takia Ghawindi, Khem Karan, Ganda Singhwala, Mughalpura Railway Station, Lahore Railway Station, Haripur Bund on River Chenab and the Macleod Ganj Road Railway Station. Out of these, only two railway stations – Wagah and Mughalpura – are now operational.
Pakistan and India entered 14 different bilateral trade agreements related to trade facilitation between 1947 and 1965. These agreements covered areas like trade in goods, border trade, air services, banking and trade facilitation. In 1965, six Indian banks had nine branches in Pakistan while the Habib Bank of Pakistan had a branch in India. It can be said that despite bitter memories of bloodshed, carnage and communal riots of 1947, a spirit of pragmatism prevailed in trade relations between the two countries.
However, the situation took a drastic turn after the 1965 war, with trade becoming the first casualty. Customs officers posted at the Wagah Customs Station were the first who became civilian prisoners of the Indian Army on the first day of the war. Bank branches operating in the two countries were seized as enemy property. Trade relations remained suspended till 1972 and were resumed after the 1972 Simla
Agreement but on a very limited scale. Even then, both countries traded with each other on the basis of positive lists which, although long, were restrictive per se.
These lists continued till 1995 when the World Trade Organization (WTO) was carved out from the General Agreement on Tariffs and Trade (GATT). India unilaterally discontinued trading based on a positive list and granted Pakistan MFN ( most favored nation) status which simply means ‘favor one, favor all’. Pakistan, however, continued with the positive list incorporated in its Import Policy Order as Appendix G. The list of tradable items registered a gradual and progressive increase. In 1995, only 328 items were importable from India but the list expanded to 687 items in 2004. In 2006, it covered 1075 items.
With the resumption of the Composite Dialogue in January 2004, trade relations became a major focus between Pakistan and India. Several rounds have been held so far. The position of the two countries on trade relations is that India considers trade based on a positive list a clear violation of WTO principles. Pakistan has shown commitment to granting MFN status to India but has deferred the decision due to political exigencies at home. The cabinet in its meeting on February 29, 2012, gave in principle the approval of a negative list, subject to further negotiations on trade with India. This negative list of 1209 items was prepared by the Ministry of Commerce in consultation with the stakeholders and notified vide SRO 280 dated March 20, 2012. The positive list (Appendix G) of the IPO will now be substituted by the negative list but the point here is that it still falls short of MFN status to India. The key question is: why is Pakistan opposed to granting MFN status to India?
This writer had analyzed the question back in 2007 in his paper ‘SAFTA: potential, prospects and limitations’ published by the Research and Development Wing of the Lahore Chamber of Commerce & Industry (LCCI) in the form of a book. Four factors were identified for Pakistan’s reluctance to trade with India on MFN basis. First is the issue of nontariff barriers in India. The perception in the local business community is that Pakistan will not gain much in terms of overall trade balance with India due to such Pakistan-specific non-tariff barriers. Second, it is argued that unless the trade deficit between the two countries is bridged, strategic considerations demand that we should not increase our dependence on India through trade.
Third, as long as a solution of disputes like the Kashmir conflict is not sought, trade relations will always remain vulnerable and can break with the slightest degree of strain. It means that longterm sustainable cordial trade relations are not possible unless the issues at the root of political differences are resolved first. Fourth, ‘the infant industry argument’ is also advanced by some sectors of business to oppose grant of MFN status to India. For example, the pharmaceutical industry is concerned about the flooding of Pakistani markets with cheap and low-quality Indian medicines. Then there are concerns about hidden subsidies, especially to Indian agriculturists in the supply of electricity for tube wells.
The situation has improved somewhat in the last few years. If a well thought-out strategy for managing trade relations between India and Pakistan is evolved, things may improve remarkably in the coming years. Sometimes semantics also matter. The first noticeable feature about MFN (most favored nation) is its very nomenclature. MFN is a misnomer and evokes the perception in the minds of the people (especially when it is translated into Urdu) that we will be giving some special privileges to India, compared to other nations, by trading with it on MFN basis. This is certainly not the case. The nomenclature of MFN is used as a bogey by hawkish elements in Pakistan to support their anti-India narrative. So a way out can be to come up with a new term without jeopardizing its spirit. Pakistan has suggested the term ‘Non-Discriminatory Access ( NDA)’ which means exactly the same as MFN. Seemingly it is a small change but it could mean a lot in terms of molding public opinion in favor of trade with India.
The issue of non-tariff barriers is another important area. Technical barriers to trade (TBTs), quotas and import licenses, aggressive use of safeguard and anti-dumping measures, frequent use of countervailing duties, multiple customs clearance procedures, stringent certification requirements, visa restrictions and nonacceptance of LCs issued by Pakistani banks, etc. are some of the nontariff barriers Pakistani businessmen often complain about. In response, the Indian side has always taken the plea that non-tariff barriers are not Pakistan-specific. Here, two factors need to be given top priority. First, a clear identification of Pakistan-specific non-tariff barriers and announcement of a sunset date for their dismantling by India is a must. It will give a sense of confidence to the Pakistani business community for trading with its Indian counterparts. Some work has already been done on this count.
Secondly, both India and Pakistan agreed to conclude three agreements – the Cooperation and Mutual Assistance in Customs Matters Agreement, the Bilateral Cooperation Agreement on Mutual Recognition between PSQCA and BIS and the Agreement on Trade Grievances. These three agreements were signed during the 7th round of Pakistan-India talks on commercial and economic cooperation held on September 20-21, 2012 in Islamabad. The need is to implement them in their true spirit without further delay.
Strong trade relations between India and Pakistan are certainly not a smooth and easy process, given the deep-rooted misgivings. But a problemsolving and proactive approach to reduce the irritants to bilateral trade can make a difference.