Pakistan-India Trade:

Pakistan’s Trade with India: Thinking Strategically
I regard it as highly unfortunate that instead of facilitating
the normal flow of trade between the two countries, the
Government of India should have embarked on a boycott of
trade with us. While fixation of the rate of currency is entirely a
question for each country to decide with reference to its circumstance,
trade is a matter of prices. India, however, has taken
the extra-ordinarily unfriendly step of boycotting trade with us.
Judging from the fact that our trade with other countries continues
to flow freely, I am led to the conclusion that India’s action is
motivated by political rather than economic considerations. This
is in line with a series of unfriendly actions in the economic
and financial fields that [India’s] Government has taken against
Pakistan since partition. 2
Such perceptions about India’s “intentions,” along with a rapid improvement
in reserves following the commodity price boom from the
Korean war (1950–53), presented Pakistan’s economic managers with
the opportunity to launch a new development strategy. Following the
trade deadlock, restrictions on the import of Indian manufactured goods
was an important element of the import substituting industrialization
strategy that created a strong industrial base in Pakistan. And the strategy
delivered results. For three decades, Pakistan’s manufacturing sector
grew at double-digit rates and helped spur average annual gross domestic
product (GDP) growth of over 6 percent. This created a strong industrial
lobby in Pakistan that would become highly influential in shaping the
country’s trade policy, including trade with India.
The wars of 1965 and 1971 and the Kashmir revolt in the 1990s introduced
a military tactical dimension to the flow of trade between the
two countries. Trade was severely disrupted and never really recovered.
In Pakistan, the debate on resumption of trade was put to the impossible
test of “improvement in ground realities.” Indeed, Pakistan persuaded
GATT to interpret clause 11 of Article XXIV in a manner completely
opposite of what had been intended—i.e., as a GATT sanction to maintain
a restrictive trade regime vis-à-vis India even as Pakistan liberalized
trade with the other GATT members.
Given this history, Pakistan and India will need to work hard to
avoid the pitfalls that might disrupt trade flows in the future, reducing
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