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If there is one common theme that has characterised Indo-Pak relations since 1947, it has been the recurrence
of geo-political conflicts. This atmosphere has overshadowed all economic and trade relations between the two countries. This love hate relationship has seen more downs than ups.
The five decades of continuous mutual political hostility, wars and suspicion has compounded the challenges to SAFTA or for that matter any other India-Pakistan trade relations. In fact, both sides viewed progress on trade issues as if each was extending a favour to the other instead of a benefit to one’s own country. With hawks dominating both sides, it is no wonder that trade between the two countries remained low. In 2000-2001, for example, India exported $186 million worth of goods to Pakistan, (out of $40 billion in total exports) and Pakistan exported around $65million worth of goods (from a total of $8.8 billion). Bilateral trade between India and Pakistan has been less than 1 percent of each country’s global trade.
History of bilateral trade
The history of the India-Pakistan trade is also very unique. Immediately after independence, India was Pakistan’s biggest and most important trading partner.
In 1948-49, 56 percent of Pakistani exports were directed to the Indian market, and 32 percent of its imports came from India. At that time despite the violence, trade flourished with almost free flow of goods and services. Pakistan mainly exported jute and cotton, while India sent finished goods. By the early 1950s as Pakistan started industrialisation, the trade between the countries reduced to a trickle. Since then, it has not revived.
Then came the war of 1965 and trade stopped completely. A revival of sorts happened in the late 1970s and the 1980s, but it was negligible. To analyse the reasons for this poor showing, one does not have to delve too deep. The problem as the Pakistanis see it is simple: the sheer size of the Indian market and central location - with 80 percent of intra-regional trade in South Asia going on and to India – is scaring. Most of India’s neighbours, especially Pakistan, remains in awe and are concerned about being overwhelmed by Indian exports.
The scare of Indian dumping has forced Pakistan not to extend the Most Favoured Nation (MFN) status to India. However, the country does maintain a long list of goods that may be legally imported from India. Since Pakistan has signed WTO, its imports cannot be taxed above the WTO ceilings.
India in principle granted the MFN status to Pakistan in 1995-1996 and has no list of permitted or forbidden products. The small quantity of imports from Pakistan is a telling reminder that trade relations are far from good. Most Pakistanis feels that India has an unwritten ban on most imports from Pakistan. That is because with the MFN status, India can tax Pakistani goods heavily and force them out of the Indian markets.
Perhaps, what is more important is that though officially no trade exists between the two countries, India and Pakistan do have trade ties. They come in three different ways.
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The illegal trade transacted through the porous land borders. These illegal trade channels are smugglers who operate along the 675 km stretch of the Rajasthan sector along the Indo-Pakistan border.
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The “informal” or circular trade, which is carried out through “third” countries and re-exported from there to Pakistan. This sort of a trade is estimated at $1 to 2 billion annually, and comprises chemicals, medicines, videotapes, cosmetics, and viscose fiber. The third markets through which these goods go to Pakistan are Dubai and Singapore, or once again through smuggling. The circular trade is conducted through agents in ports like Singapore or Dubai. The others who take part in this informal trade are the personal carriers who travel abroad and misuse personal baggage rules.
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The formal trade through imports/ exports of merchandise through all recognised seaports, airports, land customs stations and inland container depots (before the India-Pakistan flights resumed, the import and export of goods were going through Wagah border in small quantities).
Hindrances to India-Pakistan Trade
The political obstacles to smooth trade between India and Pakistan are many. Perhaps, what is most important is that any development on the political front has its repercussions on the fragile trade ties. This was evident when soon after the attack on the Indian parliament, road, train and air links were cut off. In the last three decades, the on-again, off-again war of the words between leaders of the two countries has caused major and permanent damages to trade.
On its part, Pakistan is hesitant to move forward to normalize trade relations. Recently Pakistan’s finance minister said that it would have to learn to understand and respect each other before trade and investment starts. Pakistan’s leadership is hesitant to push trade relations because it feels that in so doing, the Kashmir issue will get side-tracked.
On the economic front too, Kashmir has dominated all issues. As a result, both India and Pakistan adopted such policies that did not encourage import or export of consumer goods made locally. These policies forced exporters from both countries to look to third countries – mostly developing ones – to sell their products. As a result, there was a considerable overlap in both countries’ exports.
Take the example of textiles. Were any of the countries to export textiles to each other, the situation would become politically controversial since cheaper imports would be in direct competition with local production. In Pakistan, for instance, such a move would be opposed tooth and nail since the local textile producers are so well-connected that they have enough clout to turn government laws around.
It is not that glimmers of hope have not occurred. On April 11, 1993, the seven SAARC members signed an agreement on a South Asian Preferential Trade Agreement (SAPTA) at the summit at Dhaka. The agreement provided a broad framework of rules for a phased liberalisation of intra-regional trade. It also envisaged periodic rounds of trade negotiations for exchange of trade concessions on tariff, para-tariff and non-tariff lines.
Such preferential trading arrangements imply a reduction of tariffs on trade among SAARC member states. Earlier, at the eighth SAARC Summit, India had decided to establish a South Asian Free Trade Area (SAFTA) on the lines of the European Free Trade Area (EFTA) in order to liberalise intra-regional trade. Then on January 6, 2004, the SAARC countries signed SAFTA.
However its practical implementation is almost some time away but it is now clear that the SAARC members and India and Pakistan in particular are on the way to improve their relations.
The business community in Pakistan welcomed SAFTA and consider it essential for trade and a trend setter for future industrialisation. The liberalisation of trade may bring an economic revolution in the SAARC countries. Pakistani business houses have suggested that maximum items for tariff reduction should be included in the first phase. The time is not far off when Pakistan exports would increase rapidly and in turn with India. At least $1 billion worth of exports would be enhanced. Many cite the example of Sri Lanka and India, where the signing of SAPTA has bolstered trade by $1 billion annually.
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