Pakistan-India Trade:

Arvind Virmani
out of this research, because the negative is always publicized and sensationalized
by large segments of the media. We see this all the time in
India, and every other country in the world, including the United States.
The negatives will always be blown up. So it is very important to find
the positive, and to make the positives known. This is not a question of
biasing one’s conclusions. It is just working to make the facts known to
everybody so that people can make informed judgments.
So, for example, the first thing everyone should be aware of is that
there is a pure deadweight loss from India-Pakistan trade that is going
through third countries. Once this trade takes place directly between
the two countries, instead of transiting third states, we should see a visible
improvement, because this is going to be a shared benefit. It is absolutely
clear that both sides will benefit from it, because there is a huge
deadweight loss involved in routing trade through other countries, and
we should be looking out for that, and publicizing it.
The second lesson worth emphasizing, besides the growth pool experience,
relates to free trade agreements (FTAs). An Indian think tank,
ICRIER, which I ran for awhile, undertook a study looking at India-
Pakistan trade liberalization while I was there. It was part of a program
looking at several such agreements. We also looked carefully at the experience
of the Indo-Sri Lanka FTA. The subsequent discussions on these
studies as well as Sri Lankan business views gleaned on my visits to Sri
Lanka showed a positive view on the value of the FTA with India on the
part of Sri Lankan academics and industry.
Let me amplify this a bit by making two points, the first based on
what I observed personally, the second that I learned from a Sri Lankan
businessman. The first one, which I actually saw, had to do with what I
would call the reduction or elimination of trade diversion. For example,
I was struck by the number of Indian-made Tata trucks on Sri Lankan
roads. In a way, that was not surprising, because Tata had already beaten
the best Japanese manufacturers in India in open competition following
the reduction in quantitative restrictions and tariffs. And the reason for
that was simple—Tata trucks are more suited to Indian road conditions,
and the general conditions in which they are maintained. The whole
structure of usage in India (and Sri Lanka) is different from what it is in
the West. So again, the point here is that one has to be careful. Pakistanis
might see a similar change, but they should not see that as a loss for
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