Pakistan-India Trade:

What Can India and Pakistan Do
To Maximize the Benefits from Trade?
KALPANA KOCHHAR AND EJAZ GHANI
India and Pakistan, South Asia’s two largest countries (they have a total
population of 1.4 billion people), share a common border, culture,
and history. Yet despite their proximity, the two countries barely
trade with each other. India’s trade with Pakistan accounted for less than
half a percentage point of India’s total trade in 2010, and Pakistan’s trade
with India was less than 5 percent of its total trade.
This is about to change. In 2011, Pakistan decided to grant Most
Favored Nation (MFN) status to India, reciprocating India’s granting
of MFN status to Pakistan in 1996. India now plans to liberalize
visa and investment regimes to boost trade and business-to-business
contacts. By extending MFN status to India, Pakistan will replace a
positive list with a negative list of goods and services to be traded with
India (that is, it will switch from a list of goods and services that can
be traded to a shorter list of goods that cannot be traded). As of this
writing, the negative lists of both countries were to be eliminated by
December 2012. After the transition to MFN is completed, the plan is
that sensitive lists will be further liberalized. 1 Both India and Pakistan
will gradually phase out all tariffs on traded goods, with an expectation
of zero tariffs by 2016, as required by a fully implemented South
Asian Free Trade Area (SAFTA).
What will be the gains from trade for India and Pakistan? Which industries
are likely to benefit? How important is it for the liberalization of
trade policy to be accompanied by other reforms to improve infrastructure,
connectivity, and logistics? Our ongoing research shows that for
Kalpana Kochhar is chief economist for the South Asia Region (SAR) of the
World Bank. ejaz Ghani is an economic adviser for SAR.
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