Days into the Pulwama Attack and India withdrawing the Most Favored Nation (MFN) status from Pakistan whilst slapping 200 percent duties on Pakistani goods, the World Bank was found tweeting about the importance of regional trade in South Asia. It was plugging its latest iterations of feel-good books called: “A Glass Half Full: The Promise of Regional Trade in South Asia”, as if it lived in a parallel universe where trade restrictions between India and Pakistan were about trade. But if the report’s findings are considered, the measly trade of $2 billion between the two countries has the potential to grow to $37 billion!
India granted Pakistan MFN in 1996—Pakistan never reciprocated. But the term “most favoured nation” is rather misleading. In fact, the meaning is opposite of what it implies. Under WTO rules, a member country cannot discriminate between its trade partners and as such, any special status granted to a trade partner must also be extended to all members of the WTO. MFN simply ensuresnon-discriminatory treatment. In reality, this is not true.
Countries sign free and preferential trade agreements or regional trade deals that do exactly that—discriminate. In the case of India and Pakistan, both are part of South Asian Free Trade Agreement (SAFTA) along with other South Asian countries but the trades amongst the countries are not a result of the regional trade deal or MFN statuses. In fact, India has bilateral cooperation deals with Bangladesh, Sri Lanka and Nepal while Pakistan also has an agreement with Sri Lanka and wants to sign a deal with Nepal. Quick calculated based on data maintained by International Trade Center(ITC) would suggest bilateral trade between India and Bangladesh, India and Sri Lanka and, India and Nepal is quadruple, double and triple (respectively) of the trade that occurs between Pakistan and India due to these deals.
Since Pakistan has not granted MFN to India, it maintains a negative list (over 1000 items) under the regional deal on which there is a blanket restriction. India cannot export those items. There is also a restriction on items that can be traded on the Wagahland border (only 138 items can be traded). The negative list is different from the sensitive lists that the countries maintain which have no tariff concessions. Countries also maintain para-tariffs in the form of regulatory duties, supplementary duties, and other duties which may even be on products that enjoy concessions. If these protections were not enough, countries also maintain non-tariff measures such as sanitary and phyto-sanitary standards (SPS) and technical barriers to trade (TBT). For a deal that proposes to remove restrictions, it sure erects plenty more. Whatever SAFTA is doing, it is not liberalizing trade, that’s for sure.
After the withdrawal of MFN and the halt of trade between Pakistan and India, pundits have been trying to estimate which country would suffer more. They argue that since India exports over 80 percent of the total bilateral trade between the two countries—and considering the same pattern follows in informal trade that routes through a third port like Dubai—India will be the loser. Maybe there will be a temporary increase in prices of goods that are being trades—tomatoes in Pakistan, cement in certain parts of India, but in the grand scheme of things, neither country suffers any major loss. India’s exports to Pakistan are merely 0.6 percent of its total global exports while Pakistan’s exports to India are 1.5 percent of its exports to the world (see graph).
Both will do business elsewhere. Already with the weak implementation of SAFTA, both countries have successfully pursued deals with countries outside the region diverting trade away from the region. The aforementioned World Bank study claims India has comprehensive economic partnerships, agreements and free trade deals with some 18 countries or country groups and Pakistan has 10 agreements in force. More are being negotiated.
The question then is not whether which country will suffer more: existing trade does not warrant any major headaches, it’s negligible. The question is also not whether trade between these countries should matter. The World Bank argues that it does. The advantages of trade across the border are numerous and well-known—it can help bring costs down and may make it easier for domestic firms to integrate in regional and global value chains. It may help in technology transfer as well and so on.
The question is, does it matter? And the simple answer is no. Trade between Pakistan and India does not matter because if history serves, it never has. Geostrategic politics and tensions will always trump the economic card, however big the potential. Perhaps, for the fanciful mind then, that should be enough. Like two star crossed lovers, if nothing else, Pakistan and India will always that—potential.
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