Aug 25 - 31, 2008

People have dubbed the Trade Policy 2008-09 as India specific and that it will bring Pakistan in a relationship of further inequality with India. Some of the critics say it would be dangerous to make Pakistan dependent on Indian imports of crucial raw materials as long as New Delhi is conspiring against Pakistan in Afghanistan and secretly interfering in Balochistan. It is also being said that helping India profit from trade with Pakistan was a betrayal of the Kashmir cause. India is out to destabilize Pakistan by providing financial and weaponry support to some militants in Pakistan.

India and Pakistan are both low income countries and are amongst the poorest and least developed nations of the world. They are also two of the seven countries which have openly undertaken nuclear testing and consider themselves to be nuclear powers. Add to this the fact that the two neighbours have fought at least two full-fledged wars- with Pakistan losing its more populous wing as a consequence- and numerous other battles and skirmishes from as early as a year after independence and as recently as less than five years ago in 1999. They have a history wrought with difficulties and distrust and a future which threatens far worse.

Normalization of ties between India and Pakistan keeping in mind that different and conflicting stands and claims on Kashmir are the biggest, or perhaps one of the major stumbling blocks to normalization of ties between the two countries. Since it is unlikely that the Kashmir issue is going to be resolved to anyone's liking in the near future, the argument is that, rather than Kashmir hold the 1.4 billion people of India and Pakistan hostage, it is perhaps important to make headway in other directions, which may eventually also have a positive impact on the impasse over Kashmir.

Pakistan has signed free trade agreements with Iran, China, Sri Lanka and Malaysia, but no increase in Pakistani exports to these countries. Therefore, it is hardly valid, on the basis of this trade imbalance theory, to block trade with India. Imports of Indian raw materials and some other items are attractive because transport costs are relatively low across the border. If the increase in Indian imports is expected, it will displace the import of the same volume of more expensive imports from some other countries. This will help Pakistan cut its manufacturing costs and improve level of competitiveness. In fact, the whole theory of trade is built on the notion of comparative advantage and there is much advantage to Pakistan in trading with India.

Pakistan and India have been trading with each other since 1947 and over the years trade has come to a complete halt for only nine years 1965-74. However, despite a largely uninterrupted trade regime since 1974, the extent of trade between India and Pakistan is limited and almost negligible.

There are some curious facts about trade between India and Pakistan which need to be highlighted. The volume and scale of trade between the two countries is very small in absolute terms and as a percentage of the total trade of both countries. However, given the political history of the two countries- with many wars and consistently poor diplomatic relations affecting trade and economic cooperation- it is believed that third-country trade and smuggling increase the volume of trade.

Imports of Pakistan and India from each other have been heavily influenced by food items. There has also been considerable inconsistency and annual variability between the types of commodities imported by both countries, and other than food items, there is no consistent pattern of traded commodities. This shows that both countries, despite having had poor political and diplomatic relations, do turn to each other in times of need.

Although both countries avoid improving their mutual trading status, they turn to each other at times of crises and shortfalls of eatables. In 1990, India helped Pakistan overcome an onion and potato crisis, and again Pakistan imported 50,000 tons of sugar from India on an emergency basis in 1997. Likewise, India has also depended on Pakistan for sugar, potatoes, onions and chillies, at a time of a shortage.

The fact that the largest amount of trade between the two countries ever- of US$ 320 million- was during Pakistan's fiscal year 1998-99 is extremely interesting. Pakistan's fiscal year runs from July to June, which means that this was the fiscal year which followed the May 1998 nuclear tests by both countries, included the Lahore Declaration of February 1999 as well as the Kargil war of May and June, 1999. By any measure, this was a rather eventful year in South Asia, and yet, registered the largest volume of trade. Moreover, in 2000-01 imports from India were US$ 235 million, the highest ever. This suggests two things: India and Pakistan, despite huge differences, trade with each other at times of shortfalls and crises.

India does not import any of Pakistan's major exports. Nor does Pakistan import any of India's major exports. This explains the fact that it is because of the competitive, rather than complementary, nature of the two economies exporting similar products, and argues, that there is the 'general tendency for poor countries to trade with developed ones rather than with their neighbours until a certain level of development has been achieved'. This explains the reasons why trade did not take place between the two countries, and he thinks that 'the real scope for trade and investment is in the future and begins now.

Giving the Most Favoured Nation (MFN) status to India is not a special favour to India, but an obligation under WTO and an economic and geopolitical imperative. In this new world order, Pakistan has to face competition from all countries, including India, and hence 'instead of shying away, we should be well prepared to face the eventuality

There is also the important issue of the impact of globalization. All countries of the world are affected by it, some favourably and others not so favourably. To take further advantages or to protect themselves from the negative impacts of globalization, many neighbouring countries have established trading blocs and currently around 60 per cent of world trade takes place through regional trading arrangements. There are huge advantages and benefits to such regional trading arrangements. South Asia is the only major world region not to move towards regional cooperation and integration. Clearly, normalisation of trading ties between India and Pakistan should be seen as a first step to such trading arrangements. The policy planners must realize the fact that the world is organising itself into a number of regional arrangements and Pakistan cannot afford to be left out of them.