Pakistan in a trade group

The European Union (EU) was long regarded as the most successful trade grouping in the world as it epitomised all that was considered a win-win situation for all the member countries: a single currency coupled with the free movement of people with tariff-free barriers to trade in goods and services that allowed cumulative small individual European countries' markets to effectively compete with significant markets around the world, including the United States and Asia.
This led to several regions around the world looking at the EU with envy thereby fuelling trade groupings with the long-term objective of attaining the same level of economic cohesion amongst members as the EU. The toxic debt crisis has compelled not only other trade groupings to proceed with extreme caution in terms of a single currency but has led several EU member countries to revisit the cost benefit analysis of being a member of the Union.
The euphoria of a united Europe is fast evaporating as it has been brought home that profligacy in one member country can easily translate into a financial crisis in another. The fault line: the single currency. Thus if the Greek government irresponsibly allows its debt to pile up to an unsustainable level requiring a massive bailout package then the EU, especially those member countries contributing heavily to the package, can and did successfully compel the Greek government to cede control to a technocrat to ensure the politically challenging implementation of donor dictated austerity measures. Italy, with its own toxic debt, has been compelled to undertake austerity measures with, once again, implementation guaranteed by a technocrat. Germany and France as major contributors to the bailout package compelled the democratically elected governments of Greece and Italy to take actions considered economically appropriate.
What is the cost precisely of the European bailout package? On May 9, the European leaders agreed to inject a total of $957 billion (in comparison to the $700 billion package the United States government provided to help its own ailing financial and big manufacturing entities in 2008) hoping that this massive amount would "shock and awe" Europe's financial markets. Like the failure of the military shock and awe operation launched by the US government in Iraq, this financial shock and awe initiative was too little too late. The number of countries suffering from toxic debt rose subsequently with Ireland, Greece, Spain, Portugal and the latest Italy in the red. The remedial austerity measures designed to reduce the deficit continue to be resisted by the Greeks and the Italians through organised opposition to public sector programme cuts.
But, so argue pro-regional grouping proponents, where the focus is on trade rather than on free movement of people or a single currency the profligacy of one government within a trade group would have minimal, if any, impact on the economy of another. Thus, in such a scenario, even if a member country has an unsustainable budget deficit the likelihood of the economies of other member countries being infected is almost non-existent as there is no linkage other than in terms of preferential trade agreements. Pakistan's unsustainable budget deficits would therefore have little impact on trade within South Asian Association for Regional Co-operation (Saarc) for the obvious reason that if our exports become expensive, as a consequence of the deficit and its fallout on inflation, then the other member countries would simply cease to purchase from us and, instead, opt to deal with other member countries or from countries outside Saarc depending on the best offer price of the commodity. In other words, Saarc member countries would simply not be interested in putting pressure on our government to put our house in order.
However, with rising budget deficits, it would be to our advantage to request trade/tariff concessions within the Saarc context or urge member countries to eliminate the negative list so that export-led growth may be possible. This may well explain the decision of the government to send the Minister for Commerce to India in the third week of September with a large business delegation to seek and grant concessions with the overall objective of enhancing trade. The agreement has been reached and Pakistan has granted the most favoured nation status to India. However, issues remain notable amongst which is India's penchant, which has angered all its trading partners, for putting up non-tariff barriers. Additionally, India has Pakistan-specific non-tariff barriers as well and these must be removed before the MFN status is implemented.
Regional groupings, especially within the Saarc context, have two major disadvantages. First, because of proximity member countries are likely to experience similar weather conditions in the context of specific crop output. Thus a bad cotton crop year in Pakistan may well be experienced by other regional countries as well, particularly India. Second, given that Pakistan produces similar products to India, especially with respect to farm outputs, inclusive of our two main exports namely cotton and its related textiles, the two countries are competitors in the world market. Given the fact that Pakistan and India together do not account for a significant world demand the two cannot collude to set price at a higher level and thereby rake in windfall profits.
How much we trade with which country is a function of demand for the product and the difference in the price of the imported product from the locally produced one. Here too, conditions applicable in Europe do not apply in the South Asian context. The quantum of smuggling of basic essentials both on our eastern and western border is high and this is especially so whenever the government has provided massive subsidy on major food items like flour. Accusations that our subsidies are benefiting the Afghans and the Indians because of smuggling are certainly accurate. Thus the government needs to either adopt policies that would deter smuggling, essentially by not extending subsidies to items susceptible to smuggling, or better police its borders.
To add to the equation is the decades' long rivalry between India and Pakistan which explains why the Indians have forged a much closer and economically viable trade grouping with Saarc member countries other than Pakistan - an objective facilitated because of India's contiguous border with these states. India is also economically well placed in the world polity and has recently exercised its options to trade directly with the West. This perhaps accounts for successful US pressure on Pakistan to open road trade between India and Afghanistan under the Afghan Transit Trade Agreement while we have simply not focused on linking it with India opening its road route for our trade with Nepal and other South Asian countries.
Thus with Saarc in a logjam due to Indian mistrust - fuelled deliberately after the Mumbai attacks, or so maintains Pakistan - we must seek a more important role in trade groupings with Central Asia. Here the problem is that we have no direct route to Central Asia and war-torn Afghanistan does not present a risk-free passage to trade - be it in goods through trucks or be it through pipelines (gas) or through transmission lines (hydroelectricity). Be that as it may, the government must proactively seek membership in trade groups as a means to increase exports. True that the impediments to Pakistan's domestic output are far-reaching and range from serious law and order issues to severe energy shortage which would continue to negatively impact on domestic output, however trade groupings with accompanying trade concessions would assist in enhancing our exports.