Pakistan & Indonesia: Prefer not to talk?

Two of the worlds most populous Muslim countries have been agreeing to disagree for the last five years. Despite countless rounds of talks, officials from both Indonesia and Pakistan are unyielding to cede tariff concessions over various goods under a preferential trade agreement (PTA).
Although, Indonesia and Pakistan enjoy good diplomatic relations, bilateral trade among the two remains well below the billion dollar mark; it stood at roughly $490 million in 11MFY11, according to central bank data.
Pakistan imports palm oil, paper and paper products, tea, tyres and tubes, machinery, plastic and chemicals from Indonesia, while Indonesia imports raw cotton, cotton fabrics, cotton yarn, synthetic fibre, leather and citrus fruits from Pakistan.
So who exactly is throwing a spanner in the works?
In the rather unconcluded seventh round of talks conducted in Islamabad earlier this month, the Indonesian delegation reportedly pressed Pakistan again to lower its import duty on palm oil to the same level as for products from Malaysia. Pakistans total palm oil imports were $1.69 billion in 11MFY11.
Indonesias concerns lie in Pakistans free trade agreement (FTA) with Malaysia - signed in November 2007 - under which Pakistan charges 15 per cent less duty than standard rates on palm oil imports from Malaysia. GAPKI, the association for Indonesian palm oil producers estimates that Indonesia relies on overseas markets, mainly India and China, to absorb nearly 70 percent of its palm oil output.
A careful analysis of SBP statistics show that while Malaysias palm oil exports to Pakistan have improved from 61 percent in FY08 to 75 percent in FY10, Indonesian palm oil exports to Pakistan have indeed nosedived following the FTA - from 16 percent in FY08 to a measly 2 percent in FY10.
Indonesian officials also insisted that their Pakistani counterparts slash import duty on paper products by up to 15 per cent. According to Reuters, Pakistans commerce ministry officials turned down this demand arguing it would destroy the fledgling local paper industry.
Pakistan imported paper and paperboard products worth $281 million in FY10, with less than 6 percent sourced from Indonesia.
Pakistani officials weren without a wish list either!
During their turn, they requested tariff reductions on several agricultural products and textiles. Pakistani officials also asked their Indonesian counterparts to open up their domestic citrus fruits market to Pakistan just as they did at zero duty to China, Australia, the Middle East and Argentina.
It must be noted that the Indonesian government had raised import duty on Pakistani citrus fruits from 5 percent to 25 percent in 2005. Since then, Pakistans exports of citrus fruits to Indonesia, especially Kino oranges, have declined drastically.
Pakistan is a net importer in trade relationship with Indonesia; its exports to Indonesia have historically been abysmally low - averaging roughly $62 million per annum between FY06 and FY10. These are heavily skewed towards textile items like raw cotton, cotton yarn and woven cotton fabrics and stood at $114 million in 11MFY11.
Concessions in textile import duties, Pakistani officials believe, can do wonders for local textile industry which could benefit from the huge Indonesian market of 237.8 million people, of which 60 percent are under 20 years of age.
So will the two countries be able to overcome the current impasse?
Apparently yes. Indonesia has agreed to a reduction in import tariffs requested by Pakistan on textiles, seafood and agriculture. Pakistan is willing to reciprocate the Indonesian concessions by cutting the import duty on Indonesian palm oil. A broad-based cut in import duties remains a contentious issue though.
The temporarily halted preferential trade negotiations could jump-start during next round of talks to be held in Jakarta, which is not scheduled anytime soon. Although respective tariff reductions are on the cards, the scope and magnitude of the concessions is yet to be seen.