NORMALIZING INDO-PAK RELATIONS THROUGH TRADE
Jan 31 - Feb 6, 2011
The trade wrangling between Pakistan and India has not been in the interest of the people on both sides of the border. This month, Pakistan imposed a ban on onion exports to India via land route. Last year, India imposed ban on export of cotton to Pakistan and did not allow trucks loaded with raw cotton to proceed to Pakistan.
Unusual increase in the onion prices compelled the Indian government to scrap import duties and ban the export of the commodity. Pakistani traders exploited the situation and started exporting onions to India where onion prices had increased to 80 Indian rupees per kg in December due to damage to crops after un-seasonal rains. This had a negative impact on domestic prices and the government ultimately banned overland exports to India to stabilize prices at home. Pakistani authorities stopped over 300 trucks loaded with onions bound for India at the Wagah border. It will be in the interest of business community on both sides of the border if the two countries in a reciprocal deal allow export of onion and cotton to each other.
The formal trade with India could be doubled from $1 billion to $2 billion if only there is closer economic cooperation and that could lead to better peace. The experts believe that trade can help in normalizing relations between the two archrivals. Peaceful relations between the two neighbors through trade still remains a dream.
A research study suggests that the US government can promote mutual trade between the two countries by offering duty-free imports, if one used the other's inputs in their exportable items to the US. The study pointed out the example of US scheme of qualified industrial zones (QIZs), which was in operation since 1996, in a bid to promote peace in the Middle East between Israel with Jordan and Egypt. The scheme allowed duty free export to US market from Jordan and Egypt in case a minimum level of inputs from Israel was used in the manufacturing of these products.
A couple of years ago, an Indian based working group suggested creation of a free trade area (FTA) across the Line of Control (LoC). The working group headed by M Rasgotra was set up by the Indian government with a mandate to work out some practical solution for allowing trade between the two divided regions of Jammu and Kashmir. According to the report submitted by the group at the third roundtable conference on Kashmir in April 2007, there is lot of enthusiasm for the opening up of trade and commerce between the two sides.
The group recommended setting up a joint consultative machinery of officials and representatives of commerce from both sides, to resolve any difficulties in the flow of trade. The list of items suggested for export and import include handicrafts, fruits, cement, iron, medicines, sugar, basmati rice, machinery and equipment, and other items that are manufactured or assembled by small-scale industries in Jammu and Kashmir.
The issue of state taxes on goods traded across the LoC may be determined by the state government after due consideration of all aspects.
India and Pakistan made the landmark agreement to revive trade and commerce between the divided regions of Jammu and Kashmir in the year 2006. The two sides had already agreed to allow trading of only raw products, mostly food items, between the divided regions of Jammu and Kashmir.
Pakistan's textile sector is withstanding the worst of price hike. Cotton, an important cash crop, accounts for 8.2 per cent of the value added in the agriculture sector, about two per cent to gross domestic product and adds over $2.8 billion to the national economy. Local business community wants India to take the lead and continue reducing tariffs, among the highest in the world, especially those on goods from Pakistan. In case of a free trade deal with India, Pakistan's textile sector, which accounts for two-thirds of the country's exports, would gain access to India's largest middle class.
Last year, the panel of economists, constituted by the Planning Commission, made its final report public. The sequencing of policy implementation as a first step, trade relations between the two countries should be normalized by trading on the 'most favoured nation' (MFN) basis, the report said. The bilateral trade between Pakistan and India in 2007-08 valued $2.3 billion, representing approximately two per cent and five per cent of Pakistan's total exports and imports respectively. Comprehensive analysis of trade data shows that the two countries are important partners in trade. Pakistan's exports to India are almost half its exports to South Asia, while its imports from India are in excess of 70 per cent of its imports from South Asia, which in value terms are more than its imports from France, Canada, the Netherlands, Turkey, Iran, and Thailand. Nevertheless, trade between the two countries is lower than its potential.
The panel led by Dr Hafiz Pasha in its report urged the government to allow import of raw material from India by expanding the negative list. The panel described the fear of Pakistani manufacturing sector being swamped and rendered uncompetitive by Indian goods as highly exaggerated. The panel stated that the Pakistani industry has learnt to survive against the heavy competition that it has had to face on account of rather porous borders. Pakistani governments have historically not only had a rather lax attitude to widespread smuggling but have also followed fairly liberal import policies in respect of capital goods, technology import and production processes.
Local business community wants India to lower its export subsidies that put Pakistan at a disadvantage. Presently, imports of around 200,000 cotton bales are in the doldrums as Indian government has imposed an export duty on the produce. The lint prices hit a record high level in the country after India imposed regulatory duty on its exports besides shortfall of 2.6 million bales in crop season 2009-10.
Analysts urge on lessening trade restrictions that would not only expose consumers to a wider variety of goods at cheaper prices but manufacturers would have access to larger markets. There is a huge scope for increasing bilateral trade between India and Pakistan with gigantic consumer markets. There is a market for Pakistani cement, fabrics and many other items in India, whereas Indian automobile and pharmaceutical industries eye Pakistan with interest because of a price differential in similar products in the two countries.
India could achieve its target of tripling tea exports to Pakistan, while Pakistan could capture the India's cement market.
Smuggling of Indian goods into Pakistani markets is hurting national exchequer, local traders and consumers. Though the country's import list with India declares hardly 30-40 items, but the local markets are flooded with goods coming from India. Indian goods are in high demand in the entire country but these are smuggled illegally. The business community suggests that the prices would be fair for customers and profit margins much higher for traders if these items were coming via legal trade.
Disruption of India-Pakistan composite dialogue on enhancing trade ties was the first casualty of mounting tension between the two south Asian neighbors after Mumbai terrorist attacks in 2008. The proposed secretary-level talks on enhancing trade ties between the two countries scheduled for December 2008 in Islamabad had been postponed for indefinite period due to tense atmosphere that emerged after Mumbai carnage.
Before Mumbai attack, the two countries were engaged in negotiations to devise a comprehensive mechanism for removing the bilateral trade barriers. The two countries were expecting to enhance the bilateral trade to $10 billion a year. The prospects for expanding direct trade between the two countries had brightened after trade talks resumed between the two neighbors in 2003. The two countries had agreed to allow trucks to move into each other's border up to half or one km and construct truck terminal facilities. While Pakistan has already developed a truck terminal at Wagha with a capacity to accommodate about 100 truck lorries, India has yet to construct the facility on its side at Attari border.