MFN for India? Hard bargain required

Is India really the most favoured nation for Pakistan? This dilemma has engendered heated-debates about whether imports from the closest neighbour should be allowed in the country. Improvement of political climate between two countries, following a string of a high-level talks and visits in the past few months, has brought the worlds attention to the future of bilateral trade between the two largest economies in the South Asian region. The hustle and bustle in media corridors of the country suggest that Pakistan is musing over reciprocation of MFN (most-favoured-nation) status to India soon. The biggest economy in the South Asian region had granted Pakistan an MFN status around 15 years ago. However, there is the rub. The key challenge facing policymakers and industrialist in Pakistan is the existing trade pattern with India in the absence of an MFN status granted to the neighbour. The data complied by the Indian Ministry of Commerce suggests that Indian exports to Pakistan were more than five times that of Pakistani exports to India in 2009-10. This, up from 1.36 times in FY00, shows how the bilateral trade gap has worsened in Indias favour. Without a shadow of doubt, a sizeable amount of imports from the neighbour is due to its ascending manufacturing and technology base which provide its industries and exporters an advantage of economies of scale. In part, the credit also goes to stringent and effective implementation of non-tariff barriers on imports in India. This is also apparent from IMFs Trade Restrictiveness Index, - an index that measures restrictiveness of trade policy in terms of both tariffs and NTBs. TRI placed India 7th on a scale of one to 10 as compared to sixth for Pakistan. The cul-de-sac is that after the MFN status, imports from India would massively increase and could bring a huge damage to the local manufacturing base. The other side of the coin is that strong trade ties with close neighbours might bode well for economic prosperity in the region by reducing the cost of imports, which is otherwise imported from far distant countries. Therefore, before extending the MFN status to India, the government should closely take stock of trade and service areas where the country can take an advantage from its neighbour to strengthen its own manufacturing base. This could only be possible if Pakistan devises import policies that would increase non-tariff barriers on imports of finished and semi-finished goods, and in turn facilitate the import of raw materials and heavy machinery and equipments. Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) also shared similar views, as it has recommended the government to widen trade with India in a phased manner by allowing import of raw materials, machineries and equipments, tools, consumables and technology as well as joint ventures in the first phase. But its a catch 22 situation. The government simply can not tilt trade policy in the countrys favour without being a good negotiator.