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Trading with India: implications for Pakistani businesses

Updated April 21, 2014

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PAKISTAN has deferred granting the Most Favored Nation status to India until after the Indian elections. This provides us time to dispassionately review the implications of freer trade with India. While many studies on the topic exist, most of them do not cover all critical dimensions in their analysis.

The two most relevant dimensions are political and economic. Politically, the question is whether to trade with India until the Kashmir issue is resolved. This is a contentious question.

However, globally, economically successful countries are increasingly de-linking politics and economics. Thus, India-China, China-Taiwan and China-Japan have big disputes but are still trading extensively. Pakistan should also take the decision based primarily on economic factors.

Economically, the critical issue is the impact on producers, consumers, workers and the government. Furthermore, given that the country faces numerous internal cleavages, the analysis should be disaggregated to consider the impact on vulnerable classes and ethnicities.

Unfortunately, no study has undertaken such comprehensive analysis. Most studies focus on increased trade volumes — the assumption being that more trade means higher welfare.

However, worldwide, increased trade benefited common people in some cases, but not in others. There are two methodologically rigorous Pakistani studies which go beyond analysing trade volume alone: a 2005 State Bank report and a 2013 study by the Lahore-based Institute of Public Policy. Both provide interesting insights.

Bilateral official trade currently totals around $3 billion, with 90pc of it being Indian exports to Pakistan. Additionally, illegal and circuitous trade through third countries totals around $1 billion. This trade quantum is an insignificant percentage of either country’s global trade. This low level is not because the two countries are too economically similar to trade. There is sufficient difference in their production and cost patterns to justify higher trade.

Trade is low because Pakistan has not conferred MFN status to India, while India maintains a sensitive list under Safta. Furthermore, studies by the Indian Council for Research on International Economic Relations show that discriminatorily stringent application by India of non-tariff barriers (e.g. regulatory and safety requirements) dampens Pakistani exports to that country. Political uncertainty and visa hassles also dampen mutual trade.

Eliminating these hurdles could increase bilateral trade to $6-10 billion annually, most of it representing increased Indian exports to Pakistan. India could then become Pakistan’s biggest trading partner. Increased imports from India will not necessarily devastate all Pakistani producers, since they will largely replace existing, more expensive, imports from elsewhere.

Increased Indian exports to Pakistan could hurt medicament, certain chemicals, steel, auto parts and automobile producers. But local textile and surgical goods producers could benefit by increased exports to the neighbour country. Besides, all producers and consumers will benefit from increased energy imports from India.

These studies, however, ignore the likely impact of increased exports to India for Pakistani consumers if these exports create periodic shortages here, especially of basic personal use goods like food and apparel.

Yet, Pakistani workers will also benefit overall, as there will be a net increase of around 100,000 jobs in the country annually. However, the studies do not analyse whether the jobs created by our higher exports will be better-paying than the jobs lost due to increased imports from India. Nor do they consider the geographical and ethnic implications.

Finally, there is the three-pronged impact on the government. Firstly, Pakistan’s balance of trade may improve by $250 million annually despite the larger trade deficit with India, since imports from there will replace more expensive imports from elsewhere.

Secondly, Pakistani customs revenues will increase due to increased imports from that country. Thirdly, one must look at the impact on local industrialisation and upgradation, which existing studies ignore.

The industries which may suffer due to increased Indian imports include automobile, steel and auto-part production, i.e., some of Pakistan’s most advanced industries. The sectors benefiting from increased exports to India are less sophisticated. Thus, there might be a risk to the country’s industrialisation drive.

Overall, economic analysis reveals considerable benefits but also areas of risk and unknown outcomes. However, critical decisions are rarely based on complete knowledge or safety, and there is enough evidence of overall benefit to move forward. But it is important to look more closely at these risks and develop strategies to safeguard against them during trade negotiations with India and subsequently.

The writer is a development and political economist and affiliated as a Senior Fellow with UC Berkeley.

murtazaniaz@yahoo.com