Managing India Pakistan Trade Relations

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MANAGING INDIA-PAKISTAN TRADE RELATIONS

Economic historians and analysts have been faced with a conundrum for quite some time. They found it hard to comprehend that South Asia, which was a single large market  until a few decades ago with goods, services, capital investment and skilled labor flowing freely  and the newly independent  countries inheriting a common historical, legal, cultural and administrative background and a very well linked  infrastructure was the least integrated region in the world while East Asia with countries having such diverse background and very little in common historically had become the most integrated region  second after the European Union. Moreover, there was almost a consensus among academic economists in both the countries that the normalization of trade relations would bring substantial economic benefits evenly. Among many reasons responsible for this puzzle the political tension and rivalry between the two major countries of the region-- India and Pakistan—stands out as the main explanatory variable. In last one year there has been some healthy developments in relaxing this constraint and resuming better trading relations . Academic consensus has now spilled over to the business community and a majority of the businessmen on two sides of the border appear convinced that liberalization of bilateral trade would be in their mutual  interest. Finally, the policy makers, for a variety of internal and exogenous circumstances, seem to have overcome their reservations and a momentum has been built up in the last several months to move the process forward. The breakthrough came in form of Pakistan’s decision to grant Most Favorite Nation (MFN) status to India and moving away from a highly restrictive positive list of items that could be imported from India to a negative list. The negative list will also be phased out by December 2012 and there will be no restriction on tradable items. Out of 8000 items only 15 percent or 1209 items are placed in the negative list. The remaining 6800 can now be imported from India, while the previous positive list had only 2000 items. This is a significant change whereby 85 percent of tradable goods can be procured from India compared to 25 percent previously. The South Asia Preferential Trade Agreement (SAPTA) which both India and Pakistan has signed will gradually phase out all tariffs on traded goods with zero tariffs by 2016. The sector – wise details of negative list are given in Annex – I. Fifty percent of the goods on the negative list belong to Automobile, Iron and Steel, and Paper and Board Industries which were relatively more vociferous in their opposition to he movement from the positive to negative list.

It may be useful to recall that inspite of many hurdles and obstacles India-Pakistan trade has recorded almost a tenfold increase between 2001 and 2011 reaching a level of $2 billion. Unofficial trade, including that through third countries, is also estimated at almost the same amount. Pakistan. Estimates based on different assumptions and models indicate a jump ranging between five to ten fold from the current levels if all the barriers—tariff and non tariff barriers------are dismantled . Most studies calculate that because of low transport costs, dismantling of tariff and non-tariff barriers, grant of MFN status to India by Pakistan, and improvement of logistics arrangements the total volume of bilateral trade should be able to rise to approximately $8-10 billion annually. Pakistan and India together ship $300 billion worth of goods to all parts of the world. This increased volume would still account for about 3 percent of the two counties’ trade volume. Therefore, the expectations at least in the short run should, therefore, be tampered with a sense of realism on both sides. The full scale realization of the potential of trade will take some time but like a newly planted sapling it will require tender care in nurturing and...
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