Research Analyst
Feb 27 - Mar 4, 2012

Pak and India have signed three trade pacts such as a customs cooperation agreement, a mutual recognition agreement and a redressal of trade grievances agreement and also laid the groundwork for not only opening more land trade routes, but also bank branches in each other's countries for the first time since their creation.

These agreements were signed on the insistence of Pakistan's business community that complains about non-tariff barriers, particularly those regarding quality control and customs procedures.

The neighbors are also looking at doing more including the opening of the bank branches for which two (central) banks are in dialogue and structural and institutional framework will be put in place soon. It is expected that the representatives of the central banks are scheduled to meet in Mumbai next month.

Pakistan's cabinet has approved these agreements but deferred a decision on switching over from a positive list of 1,945 tradable items to a negative list of 636 items barred from trading, after some stakeholders expressed reservations. It has been agreed that Pakistan will move from a positive list to a small negative list by the end of February. The negative list is to be phased out gradually and the timing for that will be announced by end of the same period.

The complete phase-out that will automatically lead to full normalization of trade relations, commonly known as the most-favored nation (MFN) status, will be done before end of this year. Once Pakistan notifies a small negative list, India will, within four months, consider tariff liberalization.

Though India had given the MFN status to Pakistan under WTO rules, apprehensions exist in Pakistan regarding trade with India.

The countries agreed to work jointly to double their bilateral trade from the current $2.7 billion to around $6 billion per annum within three years. To enhance bilateral trade, a memorandum of understanding (MoU) was signed between the Trade Development Authority of Pakistan (TDAP) and India's trade promotion organization.

The ministers agreed that the bilateral trade liberalization process should be uninterruptible and irreversible and asserted that both countries would cooperate and work in close coordination at multilateral forum such as the WTO and SAARC to support each other for strengthening their economies.

Further, Pakistan's economy is small and its balance of payment position is weak and agriculture and industrial growths were also recorded decline.

The primary reasons for this state of economy is the high utility cost of our products, drawbacks in our tax structure, lack of skilful manpower, absence of competitiveness and efficiency.

Though political relations are impediment to bilateral trade ties, the role of vested economic interests perpetuating the illegal Indo-Pakistan trade also becomes relevant as they are pressure groups that prefer to sustain the status quo. The nexus of the criminals makes money from smuggling in connivance of officials. It results in a loss of revenue like customs duties, sales tax, and income tax to both governments but in turn enhances the profit margins of traders on both sides.

In reality, Pakistan's trade policy towards India goes against the WTO rules wherein a country accorded MFN status by another one is under obligation to reciprocate the same. However, Pakistan has chosen to flout this rule of international economic diplomacy. The country had set two preconditions for according India MFN status: one external and the other internal. The external condition was that New Delhi must stop subsidizing manufacturers/exporters; and the internal condition was that Pakistani industry prepares itself to compete with Indian imports.

Both countries agreed to explore the opening of the Munabao-Khokhrapar route for trade, as desired by the Indian side. A joint working group will be constituted in this regard which will report to the respective governments before the next round of talks between commerce secretaries. Further, it is also expected that, during March 2012, a second meeting of the expert group on trade in electricity will be held in Lahore. The first meeting of the expert group on trade in petroleum will be held in New Delhi while the TDAP will organize a lifestyle exhibition in New Delhi respectively.


No doubt, normalization of relationship between Pakistan and India will remove hindrances in the way of potential economic growths and subsequent improvement in social developments. The leaders in both the countries should keep engage in table talks, come what may, to resolve the serious issues inhibiting the normalcy.