Nov 7 - 20, 20

Finally, Pakistan's cabinet unanimously decided to grant India most favoured nation (MFN) trade status-a major breakthrough that could bolster efforts to improve relations between the two states.

It was not something new as both the countries had enjoyed MFN status from 1947 to 1965 and signed four agreements. India conferred Pakistan with MFN status in 1996 and has been waiting since then for it to reciprocate.

Under the principles of the WTO, the member countries are required to grant MFN status to each other, which actually means according equal, non-discriminatory status and treatment. Therefore, if a country reduces tariff on imports from a particular country or a group of countries, the MFN rule requires the same treatment be given to all other WTO member countries. But, some WTO terminologies are problematic. The MFN is one such term. The MFN, according to the WTO, acts as a major booster to the whole process of free trade, and increased trade can play a vital role in normalising the political relationship between the two countries.

Many consider MFN as a special status because of its literal sense. So, they are not ready to give the 'most favoured nation' status to India whom they consider their archenemy and with whom they have yet to settle serious disputes.

The WTO does provide exception in case the countries are actually at war. But, this is not the case between the two neighbouring countries, and if it is the case then Pakistan can follow the example of other countries like United States, which has been using the grant of MFN as a tool to achieve various objectives with respect to countries such as China, Cuba, Iran, and Libya, for years.

What is more important is that both nations now realise that improvement in economic (trade) relations should not wait for conflict resolution. However, with trade we can move towards the conflict resolution, as shown in many other instances in geo-political history, where disputes have never prevented economic cooperation around the world.

France and Germany had been at loggerheads for over a millennium, but now both are major players in the European Union, which is continuously deepening economic and political cooperation.

Malaysia and Thailand too have border disputes but this has not prevented them from cooperating economically through the Asean free trade agreement. Likewise, the war between Cambodia and Vietnam has not prevented them from reaping the fruits of a 1,500-km long cross border highway project. The Middle East Regional Cooperation projects have encouraged trade and thereby peace and prosperity in the region.

And, the most important example of this region are China and India; both are also neighbouring countries having a history of bad diplomatic relationships. Now their bilateral trade has crossed approximately $40 - 60 billion. It is a time of a trade war rather than a weapon war.

In terms of Pakistan and India, with a common border of around 3,000 km, striking cultural similarities, a common DNA and almost no linguistic barriers, India and Pakistan are natural trading partners.

Cooperation between the two countries on trade issue will go a long way in building trust and confidence and mitigating myths and distrust between the nations. There is no comparison of Indian economy to Pakistani, as India has virtually 100 percent of the total resources of the region: uranium, iron ore, copper, gold, lead, silver zinc asbestos and diamond. It has more than 90 percent of the resources in coal, crude petroleum, chromium, magnetite and salt. Moreover, India is at a far more advanced stage of economic development than Pakistan, especially in the field of heavy industry.

As compared to Pakistan, Indian economy is less dependent on external resources. The Indian policy of non-alignment during the Cold War enabled it to follow a relatively independent path of development. As a result, India was able to manoeuvre between Washington and Moscow to create somewhat independent economic base. Indian economy attracts foreign investors more than Pakistani does. India has growing partnership with the EU and Gulf Cooperation Council (GCC) countries and it has also managed to conclude civilian nuclear energy agreement with the US, hence is gaining economic benefits. Pakistan largely lacks energy resources such as oil and gas and to meet its energy needs it is forced to spend large portion of its scarce financial resources.

* With the largest number of listed companies - 10,000 across 23 stock exchanges, India has the third largest investor base in the world.

* In textiles, the country ranks fourth, while in electrical machinery and apparatus it ranks fifth. It holds sixth position in the basic metals category; seventh in chemicals and chemical products; 10th in leather, leather products, refined petroleum products and nuclear fuel; twelfth in machinery and equipment and motor vehicles.

* According to the CII Ernst & Young report titled 'India 2012: Telecom growth continues,' India's telecom services industry revenues are projected to reach US$54 billion in 2012, up from US$31 billion in 2008. The Indian telecom industry registered the highest number of subscriber additions at 15.84 million in March 2009, setting a global record.

* India ranks among the top 12 producers of manufacturing value added (MVA)- witnessing an increase of 12.3 per cent in its MVA output in 2005-07 as against 6.9 per cent in 2000-05-according to the United Nations Industrial Development Organisation (UNIDO).

* India's healthy banking system with a network of 70,000 branches is among the largest in the world.

* According to a study by the McKinsey Global Institute (MGI), India's consumer market will be the world's fifth largest (from twelfth) in the world by 2025 and India's middle class will swell by over ten times from its current size of 50 million to 583 million people by 2025.

* A McKinsey report, 'The rise of Indian Consumer Market', estimates that the Indian consumer market is likely to grow four times by 2025, which is currently valued at US$ 511 billion.

There are several factors contributing the India's steady economic performance: Consistent democratic basis/system; Active diplomacy; Pragmatic and largely neutral economic and political policies; Industrial base; and diligent services sector.

These factors have not only contributed towards India's economic stability but also attracted several trading partners, especially the EU, the Gulf States and the Middle East. Moreover, the 'Look East Policy' also ensures greater economic access for Indian goods to southeast Asian markets.

On the other hand, Pakistan's economy is not only agricultural, but continuous internal political instability and regional politics increased its dependency on external sources. The country experienced a high growth rate in late 1960s; however, that phase ended with the dismemberment of Pakistan. Among other factors, the economy also suffered due to the gradually increasing shortfall in agricultural production, war against terrorism, internal political instability and weak economy. Later on, due to continuous wobbly law and order situation, Pakistan started losing its investors as well.

India and Pakistan may be home to some 1.4 billion people but bilateral trade flows are paltry, a legacy of mistrust between them. Less than one per cent of India's merchandise exports are sold to Pakistan, in terms of dollar value.

Currently, Pakistan's exports to India stand at $300 million, while imports from India are at $1.5 billion. Of the total $1.5 billion, nearly $1.2 billion are Indian exports. Informal trade, however, is estimated to be between $2 billion and $2.5 billion, leaving most observers to believe that trade between India and Pakistan would climb on the removal of trade barriers. Pakistan accounts for less then one percent of India's trade and India accounts for less than five percent of Pakistan's trade.

Estimates from gravity models suggest that trade between the two countries could be five to 10 times larger, and would also lead to an increase in their household incomes and GDPs in both countries.

The Indian Council for Research on International Economic Relations study puts the potential of India-Pakistan trade at $11.6 billion with India exporting about $9.5 billion worth of goods and importing $2.1 billion.

According to the World Bank, annual trade between India and Pakistan is around one billion dollar and could grow to as much as $9 billion if barriers are lifted. Much of the current trade is illicit products go through Dubai, Singapore and Afghanistan, where they are repackaged and smuggled into both countries, meaning higher prices and less tax revenue.

According to the report titled 'Harnessing India Pakistan Trade Potential' says that Pakistan can save up to $2 billion a year if it grants India the MFN trade status. Liberalising the trade regime with India will allow Pakistan to import cheaper goods, which in turn will boost customs revenue. Pakistan can save foreign exchange of $1.5 billion to $2 billion if it diverts import of items such as chemicals, steel, machinery, industrial equipment and plastic--which have to be imported from far-flung markets--since these are available from India at competitive prices.

In any case, the cost of similar equipment from other countries would have been higher by at least 35 percent, so the Pakistani businessperson soundly bought the equipment from India. When he will need to buy spare parts, he would follow the same circuitous route.

If government or industrial sector feels imports from India increase due to unfair practices such as price under-cutting, government can levy anti-dumping and anti-subsidy duties on such products, as allowed by the world trade organisation.

There are, of course, winners and losers when trade opens up. But, that does not mean recent moves to increase commerce, which has the potential to become a game changer for bilateral relations.

Tariff and non-tariff barriers could also be applied to certain goods, although MFN status implies these should not be more onerous than they are for any other country. But, while it makes sense to protect certain industries, others should increase their competitiveness or make way for resources to be diverted to areas in which Pakistan has a competitive advantage. The pharmaceutical industry, for example, is concerned about the market being flooded with cheap drugs from India. But, a wider variety of cheaper drugs is in the consumer's benefit, as long as Pakistan is able to regulate the quality of pharmaceutical imports.

In terms of the Pakistan automobile industries, two countries are rivals of each other, particularly in the motorcycle sector. Pakistan is one of the few countries in the world, which manufacture all types of vehicles with higher production capacities than the current domestic demand for the same. The country annually needs 192,000 cars, 16,000 trucks and buses, 700,000 tractors and 1.5 million motorcycles. Therefore, India and Pakistan are not allowed to compete in the auto sector, particularly through their bilateral trade. And, if importing from India results in the destruction of the domestic auto industry, it might justify some protection.

India should not be looked as a competitor alone, for sure India will win the numbers game in the short run due to its huge market size, however, Indian market should be eyed as the hub of investments and transfer of technology not alone for Pakistan but for the whole region.

Economics has assumed a pivotal role in the foreign policy exercise among nations since the end of the World War II. History bears testimony to the fact that even countries of the war-ravaged

Europe displayed a vision by deciding to set aside their mutual political and security problems for widening their bilateral and multilateral economic interactions. History provides ample evidence that no neighbouring countries have ever survived and progressed in the background of prolonged belligerent relations.

Now, Pakistan and India should realize that they have poor economies. In order to provide better economic opportunities to their public and better their economic standard, they must exploit the untapped trade and investment opportunities through joint ventures with a vision of collective wellbeing. Secondly, the bilateral trade will open up opportunities for foreign investors as well. Both the countries require foreign exchange to stabilize and for the growth of their economies and increased bilateral trade will enhance the confidence of foreign investors.

Thirdly, the increase in direct official trade will boost the two economies. They share common border and direct trade will be lesser in cost and higher in profit.

Hopefully, trade can bring peace in the region as deep animosities can be overcome by trade, which produces a dynamic of interdependence between the people and owners of productive systems. There will be a huge peace dividend if trade relations are strengthened. When two countries trade with each other, people develop an interest in how to maintain peace, so that the flow of goods and services is not disrupted.