Free but fair trade

Courtesy:- Dr Maleeha Lodhi

The economic conference organised earlier this month by the Jang Group and the Times of India did more than bring together business leaders from Pakistan and India. The meeting in Lahore offered a timely opportunity to assess progress in the trade relationship, review the benefits of liberalisation, identify the hurdles, and propose ways to overcome them.

Soon after independence when the General Agreement on Tariffs and Trade (GATT) was concluded, its framers envisaged that Pakistan and India would constitute a customs union in a mutually supportive economic relationship. That the Lahore conference marked the move towards according Most Favoured Nation status to each other – an agreement simply not to discriminate against one another – served both as a reminder of the reversal in the two nations’ trade relationship in the six decades after independence and a measure of how far they have to go to realise the potential of trade.

The conference took place in the backdrop of an improved bilateral environment and launch of official initiatives to liberalise trade. Several speakers reviewed these steps. In April a new, integrated border check post was opened to facilitate the flow of goods. In February Pakistan’s cabinet decided to replace the positive with a negative list, substantially increasing the items to be traded. The plan now is to phase this out and remove restrictions on tradable items by December 2012, once negotiations are successfully concluded with India on a level playing field for Pakistan.

To address mutual concerns in normalising trade, three MOUs have been signed on: a) customs cooperation, b) mutual recognition and c) redressal of trade grievances. The key to further progress lies among other things in managing what Dr Ishrat Hussain, former governor of the State Bank, identified as eight economic and non-economic risks. His call to separate emotion from facts was a welcome one. Unless trade relations are embedded in reality, they risk being short-lived.

Along with the common refrain at the conference about the need to move past the past, the hurdles in trade relations were detailed especially by Pakistani speakers. “Nothing”, said Razzak Dawood, “will happen unless the visa regime is simplified”. This elicited assurances from officials that the upcoming meeting between the interior secretaries of the two countries would liberalise the cumbersome visa regime for the business community.

The advantages of mutual trade between South Asia’s two largest economies have long been compelling. Even if all that happens is the bilateralisation of current indirect trade – which takes place through third countries or other ‘informal’ ways – the dollar volume of the present level of $2.6 billion in annual trade could quadruple. The potential of course is much more. Several speakers said bilateral trade would rise to $12 billion annually by 2015 and double that in ten years.

To achieve this potential, trade has to be free, but it also has to be fair. Trade liberalisation can be sustainable only if it is fair, balanced and mutually beneficial. At present bilateral trade consists of 15 percent of exports from Pakistan and 85 percent from India. So a conscious effort is required, and better preparation by Pakistan’s trade and industry, to ensure greater equity in trade flows.

In particular the WTO’s provisions on non-tariff barriers and other disguised means that India uses to limit competitive exports as well as those relating to explicit and hidden subsidies need to be faithfully implemented. Otherwise the spirit and substance of MFN will be defeated.

India’s trade regime continues to be much more restrictive than Pakistan’s. The issue of tariff and non-tariff barriers (NTBs) resonated at the conference. Other than more general impediments imposed by India’s restrictive practices there are several Pakistan-specific barriers. They include stringent and lengthy certification requirements, transit restrictions, undue delays at customs posts and multiple customs clearances. One speaker referred to an official Indian report that acknowledged that surveillance of those importing goods from Pakistan by India’s security agencies created formidable problems.

These issues and asymmetries in the tariff structures of the two countries have to be resolved for fair trade. Pakistan also needs to strengthen its physical and institutional capacity to ensure it can compete on equal terms. Pakistani officials assured participants that a positive outcome to negotiations underway with India on elimination of NTBs was a prerequisite to implementation of MFN status and scrapping the negative list.

Influential Pakistani voices at the conference also reminded the audience that trade alone will not unlock solutions to the outstanding political disputes between the two countries. But it could lend impetus to problem solving provided a deliberate effort is made to settle disputes.

It is worth remembering that movement in trade liberalisation and accompanying improvements in the political ambience, are as yet fragile. As has happened so often in Pakistan-India history, painfully achieved progress can be quickly reversed by an accident or incident arising from their political differences. Recent history also shows that the public mood in both countries, which today supports normalisation, can shift suddenly and dramatically.

Thus moves towards trade normalisation should not create a sense of complacency that resolution of disputes has become any less urgent or imperative. On the contrary, the positive atmosphere created should be utilised to find solutions wherever possible and to generate visible momentum for progress on all outstanding issues including Kashmir.

There is no reason, for instance why the previously agreed outcome on the Siachen issue – based on the 1989 joint statement – cannot be formalised to end military deployments by both sides, which exact such a high human and financial cost.

Steps taken in the past year by both sides to expand trade are an important indication that the two countries want to accord primacy to economic development rather than political confrontation. As economic progress is a priority for both countries, they should also have every reason to avoid an expensive arms race, conventional and strategic that is still underway. Both countries must find a less dangerous and costly approach to preserve peace and security. Weapons acquisitions and developments should address real not ‘contrived’ threats to security or those designed to project ‘Great Power’ status.

History teaches that power including military power flows from the achievement of economic and social progress, not vice versa. Today both countries posses powerful militaries, deployed mostly against each other. Both are modern states in some areas, but hardly so in others. In fact South Asia still contains over half of the world’s poorest who live in conditions often worse than in the poorest parts of Africa. Neither country should ignore this grim reality.

Apart from Kashmir, the one issue that will dominate Pakistan-India relations in the future is the equitable distribution and efficient use of the waters of the Indus Basin. So far agreement that has been elusive on water disputes. This must be forged in a spirit of accommodation on the basis of the existing Indus waters treaty. A might is right approach will not work here anymore than it has in other areas.

If the political obstacles can be rationally addressed by Pakistan and India this can open the door to three new and exciting dimensions of mutually beneficial economic cooperation.

• Implementation of the South Asia Preferential Trade Agreement (SAPTA), in terms of population the largest customs union in the world. This aims at zero tariffs by 2016.

• Significant investment flows from within and outside the SAFTA zone.

• Establishment of transit, transportation and energy links between South Asia, Central Asia, West Asia and China.

As Mian Mohammed Mansha put it at the conference, the economic epicentre of the world is shifting to Asia. This offers unprecedented opportunities for those bold enough to seize them.

The prosperity that the above three approaches could generate are limitless. But there are hard choices for both the governments of India and Pakistan to make. Without these and the political accommodation needed to address outstanding disputes, the trade opening could turn out to be another false start rather than a promising, new chapter in the relationship.


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