Pakistan-India Trade:

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The Pakistan-India Trade Relationship: Prospects, Profits, and Pitfalls The road To Mfn In the first essay, Zafar Mahmood, Pakistan’s commerce secretary at the time of the conference (he was appointed water and power secretary several weeks later), offers an insider’s account of the events leading to Islamabad’s decision to grant MFN status to New Delhi. When the two sides restarted their Composite Dialogue process in 2011 (it was launched in 2004, but suspended after the 2008 Mumbai terror attacks), a breakthrough on trade may have seemed unlikely. Pakistan was still unhappy about the revelation—brought to light in a 2007 analysis produced by an Indian think tank—that Indian traders importing goods from Pakistan were under surveillance by Indian intelligence agents. Additionally, to Pakistan’s chagrin, India—despite Mahmood’s personal appeal to New Delhi’s World Trade Organization (WTO) ambassador—was opposing a European Union (EU) assistance package offered to Pakistan in the aftermath of the latter’s devastating 2010 floods. Mahmood credits the savvy diplomacy of Anand Sharma, India’s commerce minister, for helping engineer a turnaround. Sharma invited his Pakistani counterpart to New Delhi in September 2011. The meeting resulted in India dropping its opposition to the EU package, and both ministers agreed to pursue full trade normalization. This visit, Mahmood writes, “created a conducive environment for Pakistan to move forward,” and in early November Pakistan’s Cabinet reached its MFN decision. PaKisTan-india Trade: a CheCKered PasT According to Mahmood, cordial bilateral trade ties are nothing new. In fact, he writes, they have often blossomed even while political relations wilted. In 1948–49, 56 percent of Pakistan’s exports were sent to India. For the next several years—a period of tense political relations—India was Pakistan’s largest trading partner. Between 1947 and 1965, the two nations entered into 14 bilateral agreements related to trade facilitation. In 1965, the year Pakistan and India went to war over Kashmir, nine branches of six Indian banks were operating in Pakistan. And in 1972, following another Subcontinental war the previous year, the two sides concluded an agreement that produced a resumption of limited trade. | 3 |
Michael Kugelman At the same time, trade ties have often become a casualty of the decades-old mistrust and enmity hampering Pakistan-India political relations. Ijaz Nabi, a visiting professor of economics at LUMS, traces the first major trade dispute to 1949. That year, India devalued its currency, but Pakistan refused to follow suit. In retaliation, New Delhi imposed an import duty on jute, one of Pakistan’s chief raw materials exports to India. Pakistani restrictions on imports of Indian manufactured goods soon followed. These developments contributed to Pakistan’s decision to launch a relatively successful import-substitution strategy in the early 1950s (Pakistan’s average annual GDP growth would exceed 6 percent for several decades). The 1965 and 1971 wars “severely disrupted” crossborder trade, Nabi writes, and it “never really recovered.” The Case for Trade norMaliZaTion Nabi, echoing the views of this collection’s other contributors, asserts that greater Pakistan-India trade can bring tremendous benefits to Pakistan. Consumers would enjoy lower product prices and more variety. Technology transfers from India would improve Pakistani farm productivity, while lowering manufacturers’ production costs and enhancing their competitiveness internationally. Small manufacturers would increase their efficiency by partnering with larger Indian counterparts, and enjoy advantages of scale thanks to bigger export markets. Finally, the Pakistani government would benefit because more legalized trade would generate revenues currently lost to smuggling. In fact, Nabi writes, Islamabad should tap into this increased revenue to provide “compensation measures” to those who suffer from trade normalization. India can also gain immensely from increased trade, according to International Monetary Fund official Arvind Virmani. He identifies two reasons why the Indian business community is particularly supportive. One is that Indian business leaders already know liberalization works, because domestic economic reforms in the early 1990s—which slashed tariffs and ended decades of protectionism—made the country’s industries stronger. “We expected industry to adapt, adjust, and survive—and it did,” writes Virmani, who has served as a chief economic adviser to the Indian government. Another reason why Indian businesses | 4 |
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Woodrow Wilson Center Pakistan Scho
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