Pakistan-India Trade:

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
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