Dr. Ayesha Siddiqa interviewed Dr. Turab Hussain of the Lahore University of Management Sciences for Naya Daur; the two academics discussed why trade relations between India and Pakistan, who are otherwise natural trade partners owing to their status as geographical neighbors, have not yet normalized.
Dr. Turab Hussain attributed the lack of progress to the geopolitical tensions between the two countries, and noted that the diplomatic relationship between the two countries has been particularly icy since 2015, which explains the lack of progress. He also predicted that if the status quo persists, it is unlikely that any serious progress will be made any time soon.
Dr. Turab Hussain traced the history of trade relations between the two neighbors, and recounted how he was part of the research group that was evaluating the benefit of a trading relationship between the two neighbors in the early 2000s.
Dr. Hussain recalled how India had granted Pakistan MFN (most-favored nation) status in 1996, according to the provisions of the World Trade Organization (WTO). While Pakistan did not reciprocate owing to high tariffs in India, Pakistan did eventually move from a positive-list trading regime to a negative-list trading regime. A positive-list system is more restrictive, whereas a negative-list is more permissive, with only a few sectors or products demarcated as exceptions to overall market access.
Ultimately, the goal from the Pakistani side was to reciprocate and grant India MFN status because all research and studies indicated that the effect of trade would be largely positive for both countries.
With the trade volume between the two countries amounting to $2 billion, studies indicated that the trade potential between the two neighbors was anywhere from $20 to $30 billion, since both countries are large markets and share a very long border.
Dr. Hussain remarked how the response to normalizing trade was largely positive from Pakistan’s business and merchant community, and while the agricultural sector’s representatives had a few reservations over the subsidies and price supports that were given to India’s farmers by their government, those too were ironed out through negotiations over a tariff-cum-quota regime to manage trade in agricultural products. The garments and textile sectors were particularly enthusiastic about accessing the Indian market, Dr. Hussain notes.
When the PML-N government took over in 2013, they waited until India’s elections in 2014 to proceed with the granting of the MFN status to India. There was a domestic controversy brewing in Pakistan however, over the translation of the words “most favored nation” in popular discourse, where the media also played an irresponsible role by misrepresenting what the term meant. Ultimately, MFN was changed to NDMA (non-discriminatory market access) to assuage the concerns of hyper-nationalist factions in Pakistan.
Both Dr. Siddiqa and Dr. Hussain were in agreement that the escalation of geopolitical tensions after the BJP’s rise to power in 2014 led to a situation where the “moment and opportunity was lost.” Pakistan never followed through on granting MFN (or NDMA) status to India, and Pakistan’s own domestic imperatives as a security state imperiled the normalization of economic relations.
Dr. Hussain remarked that there had been significant buy-in from the military establishment over the normalization of trade with India, but that this was lost owing to a “lack of trust” between the establishment and the PML-N, whose personalized brand of politics contributed to the mistrust. An “institutionalized process became personalized” under the PML-N, and the trust deficit hindered diplomatic progress with India.
“Had the volume of trade expanded to something like $5 or $6 billion, it would have created vested interest groups on both sides of the border,” which would have immensely raised the costs of severing the relationship between the two neighbors. Since the volume of trade between the two countries was very low, there were no “economic costs to geopolitical escalation,” suggested Dr. Hussain. Dr. Siddiqa remarked how trading relationships would have created “constituencies for peace” on both sides of the border.
Trade with India would have been beneficial for Pakistan, as access to cheaper raw material, inputs and intermediate goods would have lowered the cost of production across the domestic economy, and subsequently made our exports more competitive.
In the status quo however, India sees no benefit to trading with Pakistan, which is “a stagnating economy with only a 2%-3% growth rate” at best. Unfortunately, there exist no incentives on either side to start the diplomatic conversations that could lead to more trade.
“No one really wants to trade with a basket case economy,” said Dr. Hussain. “Even though ours is a large market, it is a stagnating market.”
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A very good initiative has been proposed. It, however, misses one point. There is a SAARC Agreement for a South Asian Free Trade Area (SATFTA). Every South Asian country except Pakistan, abides by that Agreement. All that Pakistan needs to do is to implement the agreement, which every other member of SAARC abides to, and benefit from it.
G Parthasarathy
Former High Commissioner of India to Pakistan.