India-Pakistan Trade: Better Late Than Never
November 11, 2011
Q1: What does Pakistan’s decision to grant most-favored-nation (MFN) status to India mean?
A1: Last week, Pakistan announced its intention to begin normalizing trade relations with India, ultimately granting India MFN status. This means that Pakistan’s tariffs on Indian imports would receive the same treatment as imports from its other trading partners. MFN status was a building block of the General Agreement on Tariffs and Trade (GATT) system, which required that GATT members treat each other equally and prohibited discrimination among its members. India and Pakistan were original members of the GATT (now the World Trade Organization), so this should have occurred back in 1948. India granted MFN status to Pakistan in 1996, at which time Pakistan did not reciprocate and instead used a “Positive List” of items that were allowed to be imported from India. The Positive List has grown from a few hundred items to almost 2,000 currently. Once MFN status is granted officially, this will change from a Positive List to a List of Sensitive Items, which will still be subject to restrictions.
Q2: Do India and Pakistan trade anything yet?
A2: Current bilateral trade is thought to be between $2 billion and $3 billion, most of it in three sectors—chemicals, base metals, and machinery and electronics—going through unofficial channels, mainly Dubai, costing both economies valuable revenue and increasing the price of goods on both sides of the border. After MFN status is granted, most of these goods should be traded via direct, official channels, saving both time and money and benefiting consumers in both countries.
This past September, when the commerce ministers of India and Pakistan met, they agreed to work jointly toward doubling bilateral trade to $6 billion by 2014. They also agreed to liberalize the visa regime for the business communities of both countries by November 2011.
Q3: What other challenges to trade remain?
A3: Nontariff barriers and infrastructure challenges remain. For now, the only point of trade along the India-Pakistan border is the Wagah crossing—between Amritsar, India, and Lahore, Pakistan. A sea route from Mumbai to Karachi is another option for trade. But ports, like the land crossing, would need significant modernization and development in order to handle the expected increase in trade. Some economists in the region note that the most pressing nontariff barriers concern the customs process, including certifications and labeling of goods.
Q4: What does this mean for the future of India-Pakistan relations?
A4: With an expected jump in trade, a simultaneous increase in people-to-people and private-sector interaction is logical. Increased trade should be seen as a starting point for reducing tensions between the two countries and as a step in the right direction. The move also seems to indicate that the countries are willing to separate economic issues from their more difficult political issues, which can only help move forward the formal dialogue they resumed this summer. (These talks were suspended after the 2008 Mumbai terrorist attacks.)
With Pakistan’s announcement of MFN status for India and pledges by Prime Ministers Manmohan Singh and Yousaf Gilani at this week’s South Asian Association for Regional Cooperation (SAARC) meeting to implement a liberalized visa regime, Pakistan clearly recognizes the benefits of being connected to the region’s largest economy. At an hour-long meeting on the sidelines of the SAARC summit, the prime ministers also agreed to move ahead with their obligations under the South Asian Free Trade Agreement (SAFTA) toward a Preferential Trade Agreement (PTA)—an ambitious goal, but another step in the right direction. The PTA would require that all tariffs on traded goods be zeroed out by 2016. The prime ministers also pledged to fast-track implementation of cross-border trade. There is always the chance that fundamental political differences can sidetrack the recent goodwill gestures and economically beneficial measures, so cautious optimism is in order.
Persis Khambatta is a fellow with the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Ketan Thakkar is an intern with the CSIS Wadhwani Chair.
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