TRADING PARTNERS AND OUR OPTIONS

SHAMSUL GHANI (shams_ghani@hotmail.com)
Aug 25 - 31, 2008

With the trade and current account deficits assuming an alarming proportion, Pakistan trade needs an immediate policy review. The import segment, comprising mainly essential items with inelastic demand, affords little room for any drastic change as far as the volume is concerned until and unless an import substitution scenario develops. The import source is an area that can be advantageously reviewed. The export segment, with a huge expansionary potential, has to be the focus of review from volume, diversity and destination standpoints. The much talked about "gravity model holds great relevance to our case. According to this model, the land mass of the country and its distance from the prospective-trade-partner country determine whom it should be trading with. Opting for the nearest import source and export destination develops a many-faceted synergy. Savings on time, freight and communication accrue in addition to cutting on the risk probability.

In the long term, aggressive agriculture and hydro / coal energy policies can turn Pakistan into a food and energy exporting country. The diversification of export and cutting down on heavy reliance on textile export are short to long term measures to improve our external account performance. Focusing back on the gravity model, we take a brief view of our existing trade partners. Since long, around 50 per cent of our exports have remained restricted to US, UK, Germany, Hong Kong, Saudi Arabia and Dubai as per detail contained in the following table:

TABLE - SHOWING PERCENTAGE OF EXPORTS TO THE MUCH-FOCUSED GROUP OF SIX COUNTRIES

YEAR

US

UK

GERMANY

H-KONG

S-ARABIA

DUBAI

TOTAL

2002-03

23.5

7.1

5.2

4.6

4.3

9.0

53.7

2003-04

23.9

7.6

4.9

4.7

2.8

7.3

51.2

2004-05

23.9

6.2

4.8

3.9

2.5

3.3

44.6

2005-06

25.5

5.4

4.2

4.1

2.0

5.6

46.8

2006-07

24.6

5.6

4.1

3.9

1.7

7.5

47.4

2007-08

26.4

5.6

4.3

4.0

1.7

1.7

43.7

In addition to the most-focused group of 6 countries, the following three regional groups are also important from our exports' point of view:

1. Latin American group comprising Brazil, Chile, Colombia, Mexico, Nicaragua.

2. African group comprising South Africa, Kenya, Madagascar, Mozambique

3. Non traditional European group comprising Scandinavian countries, Poland, Greece.

INDIA: OUR NATURAL BUSINESS PARTNER?

The divergent views of the Indian and Pakistani press spark a prolonged debate that submerges the pros and cons of the issue to the point of incoherence. The disparity in the market size and the resultant Indian dominance, a persistently negative trade balance and the flooding of local markets with the Indian goods are the most hyped fears of the Pakistani press. India naturally looks more interested and focused as it has already accorded the MFN status to Pakistan. The Indian press and industry lobbies see the present Indo-Pak trade size of less than $ 2 billion expand to $9 billion. The politics mostly based on religion and past animosities has also been an impediment in the way of a free trade regime. The fears, mostly on the Pakistani side are, after all, not so unfounded. Being a bigger and hugely attractive market and politically a better positioned nation, India has been using subtle tactics to outwit Pakistan. It has been tactfully active in freezing Pakistan out of certain regional trade groupings - SAFTA and BIMSTEC being the cases in point.

Agreement on South Asia Free Trade Area, SAFTA, having come into being in January 2006, aims at developing a framework for a free trade zone covering around 1.5 billion people of SAARC countries namely India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and Maldives. The agreement envisages a zero-duty trade of almost all products between the member countries by the year 2016. It has been argued that India tries to play cold with the regional trade groups that include Pakistan. Instead of making SAFTA a viable and effective arrangement, India has opted to focus on a similar regional grouping BIMSTEC (Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation). Besides Thailand and Myanmar, BIMSTEC includes six of the seven SAARC members with the exclusion of Pakistan. Disillusioned by the outcome, Pakistan has started to look to the D-8 group of Muslim countries including Pakistan, Bangladesh, Nigeria, Turkey, Iran, Egypt, Indonesia and Malaysia. To become an effective trade group, however, the formation of D-8 will have to do away with its non-Arab garb to include the oil rich Arab countries. This will form a nexus of oil exporting and importing countries that could benefit from each other's presence through long term oil import-export arrangements. . Presently, D-8 includes only one large oil producer and exporter - Iran. Indonesia and Nigeria are no more oil exporting countries.

The gravity model decrees that Pakistan, India and China be the most natural trade partners. Despite an effective free trade agreement with China, the volume of our trade with it has not been optimal due to the two countries' deficit and surplus mismatches. Having no political barriers, the two countries need to intensify their efforts to identify and develop further economic synergies. The strife-ridden Indo-Pak relations have resulted in an endless squandering of economic opportunities. One thing is for sure that the cold economic war between the two neighbor countries will only support the zero-sum game theory. They should rise above petty economics and brace up to take advantage of a number of synergies waiting in the wing. Here is a quote from the Indian press, "the bloody partition that resulted in the birth of the two nations, wrangles over territory and inflated egos often characterizing young and proud nations have ensured that only a tiny fraction of potential cooperation has been achieved."

Proud yes, but now we are not as young as to fake childish denial of realities