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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.
Comments (43) Closed
We need to analyse the statement "The industries which may suffer due to increased Indian imports include automobile, steel and auto-part production, i.e., some of Pakistan
Free trade will be the first step towards economic integration beneficial to both countries and lower the military temperature.
It seems that the people of Pakistan have still lots of misgivings with regard to free trade with India. I simply wonder that why all these factors are not taken into account as narrated in this article when the agreement was finalised and was to be only signed. Let the Peole of Pakistan make up their mind, never worry about the time factor. But once if there is any consensus, then it should not be looking back. The negotiations often undertaken between the two countries and then when any agreement results, it becomes all mockery when Pakistan develops cold feet just at the time of signing. Please do your home work seriously and then come with a firm resolve to move ahead.
The industries which may suffer due to increased Indian imports include automobile, steel and auto-part production, i.e., some of Pakistan
While free trade with India might benefit the consumers and would lower the military temperature when we have so much of uncertainly on our western borders but it will also discourage the indigenous freedom struggle in Kashmir. I think we should not be in a hurry and insist on the solution of Kashmir problem as per the UN Resolution.
Let Pakistanis take their own time . India should be in no hurry . If they like to trade we may respond positively . If not we should not bother to much and leave them to their choice We are as such doing well on our own terms.
This conversation include political elements such as Kashmir and trade. Those who link Kashmir and trade are not friends of Pakistan, because that will delay trade until cows come home. And that will take hundreds of years even when cows are made to run, not walk.
Useless piece of analysis. Sitting Berkley, why don't you advise USG to open textile trade for Pakistan since competition will benefit US. Ask India to stop giving subsidies and remove trade restriction. It sure would help Indian consumer. Pakistan produces high quality mercenaries , India should be hiring some. How are you going to cover dollars needed to cover the trade deficit? People like you never answer tough questions.
Our economics professor told us that when local industries can't take the competition from foreign industries, they take refuge behind "patriotism" aka destruction of indigenous industries. I understood the lesson better now. Importing from India will reduce the cost (transportation etc) involved in a trade, so more people enter the business, that means more competition and less profits. Hence, link it with Kashmir or some other issue and stall the idea for the time being.
Two foundations on which free trade can prosper are often ignored or downplayed by the proponents. First, the theory of comparative advantage while intuitively valid, is abased on several impractical and utopian assumptions. So flag-bearers of competitive advantage should not over-sell this flawed but generally workable approach. Second, proponents of free trade often in their enthusiasm downplay the psychological factors. People entering trade should trust each others' motives as also their mutual abilities. In uneven relationships, this confidence building requires the more powerful of the two to make the initial concessions. India has done that by conferring the MFN status on Pakistan. To get Pakistan to do the same, well it is going to be a slow dance. The slow and torturous process has to be pursued because ultimately free trade benefits the people of both countries.
@Ahmer: u r head
@Ahmer: WHat about Freedom Struggle in Balochistan and SIndhudesh? Shouldn't you be more concerned on that?
I hope that there is a freer trade between the two countries.
Economics binds and politics divides nations all too often.
There are posts here which suggest that competing with India will increase the efficiency of Pakistanis...and,that would largely be true.
After decades of off shoring of manufacturing to China from the US,a new phenomenon is happening -that is re shoring ...it is happening because energy costs have come down in the US because of a technology called fracking which helps companies to look for oil and gas much deeper than in the past.
And,of late so many of industries are benefiting from robotics which is supposedly reducing costs of manufacturing without use of human workers!
Something very similar should happen when free market forces come into play in the trade between these two countries?
Some of the biggest investors in China are from Taiwan with whom China has a very antagonistic relationship?:)
@Ali: Your facts are far from truth. Due to Chinese imports the public is buying cheap products and the purchasing power has down ten fold in USA. The people working for Walmart ( biggest retailer of Chinese products, some 3.5 million workers are on government charity ) are poor without homes and health care. The Americans are still eating just because of hi-tech and military exports. Pakistan is no USA. You are comparing apples from oranges and you are very na
It will be Pakistan's loss if the trade agreement is not put in place almost immediately. The cost of manufacturing is increasing in India. Indian manufacturers who are already in export business have started to expand their industrial bases to different parts of the world, because of lower costs or proximity to markets. Pakistan could thrive to become a favorite destination of relocating Indian Industry provided it creates a business conducive environment, provides electricity and lower labor costs. The exports from these companies will count towards exports value addition of Pakistan. Such economic cross pollination will help Pakistan more than India.
It seems like Pakistan's attitude is ,even if we lost both eyes, we want the other party to lose at least one
More trade = always good because of efficiency improvements. But this should be done gradually because sudden changes will affect some people adversely.
@Ahmer: Pakistan is prepared to lose out but still wouldn't do business with India as it might benefit India. Basically sums up pakistan's foreign policy.
This is the only way for Pakistan to improve their industry and standards and be competitive not only in India but globally , while in India there is hardly any discussion about the free trade as they see it not politically or otherwise.
@NORI: Yes but in the end the end user always benefits, Imagine paying less for all the goods you buy. It is not India's problem that Pakistan is not competitive in quality and price. Sorry but if you want to be a better business you must go against better competitors. Our aim is to see the benefit of the common man, though sad Pakistani businesses wont be able to compete it is only understandable.
f Free Trade with Pakistan is hardly an issue in India neither discussed by people nor by the media.With so many Free Trade Agreements, people in India see products of many nations inclg. fruits, biscuits, chocolates and so many others that are locally produced to high quality for decades.The local brands simply adjusted themselves to imported competition and life carries on well even with over $120 billions in trade deficit.Giving so much of importance by the politicians of Pakistan is the reason for this issue being discussed. Let Pakistan say that they do not want Free Trade with India and close it. In India it hardly matters and that is the reality.
@Ali: Correct ali. Cant agree more.
Why PM Shariff is in a hurry to sell his sugar to India?
@Ahmer: Please dont be misled by people's statements there! kashmir is only "An Issue" . The main issues anywhere here should be Food,Shelter and Water !
Example has been give of excellent trade despite political tension between China-India, China-USA, China-Japan and few others. But can we have these kind of trade growth with a immature, unstable and almost failed country like Pakistan. The country which still wants to keep Economic in backburner and want political issues at the front.
PAKISTAN has deferred granting the Most Favored Nation status to India 123,456,789........ times
@Nizamuddin Ahmmad Aali: The problem is the USA is due to countries like China and India putting emphasis on education and producing large no. of professionals esp. engineers who are needed in this age of knowledge economy.But a large no. of Americans also live very well and it is still the world's largest economy 3 times bigger than China hat has three times more population than the USA. Do not compare India and Pakistan with the USA as they have still many really poor and have to move up. Pakistan has been discussing and discussing - now make up your mind pls.
@Qasim M Sheikh: And what about the loss in jobs as a result of these un-competive industries closing. Also in long run high import low exports leads to further devaluation!
@alex: What are the geographical and ethnic implications that the author thinks will affect India-Pakistan free trade?
@Qasim M Sheikh: what you say is right, qasim sheikh sahib. Pakistani industry is totally incompetitive. reason is simple. it is overly protected. open it to competition and it will start striving to gain efficiency. we must not fear indian export onslaught. instead, we must meet it head on. improve our economic policies and get on with this trade thing, not only with india, but other nations of the region as well. I think Pakistan has what it takes to meet indian challenge. we just need to organize ourselves. Pakistan is better situated to produce more not only in terms of agriculture but also in manufactures.
@omair....The model you talking about is not a sustainable in the long run. For the fear of losing jobs, you can't support high consumer cost production policy.
Not a good idea. Indian traders are traditionally very sharp and they can damage Pakistani business.
I think Pakistan should think carefully and weigh the consequences/alternatives before signing an FTA.
We shud not have free trade with India because it will lead to our re-Indianization, many Muslims may even revert to Hinduism. We have chosen to become Arabs and we should stick our path of Arabization. Until we are fully Arabs we should canvass Arab countries for increased financial aid.
I think India should withdraw MFN status to Pakistan. GDP of Pakistan is roughly the same as that of Gujarat. Trade with Pakistan will not make any material difference to India.
Both Pak & India should actively avoid trading directly with each other:
From Pak side (disadvantage of trade): - Pakistan will be in -ve in balance of trade, - People of Pakistan will be constantly blaming India for their job loss (eventhough the real reason may be China imports) - Pakistan will loose auto industry, but gain on smaller things like textile (one more reason to complain about India).
From India side (disadvantage of trade): - Eventhough 95% of B2B connections may be genuine, the 5% connections would cause unacceptable damage to relationship by bringing in black-money and funding heavenly activities - yee know what I mean. - Let Pak feel good having trade with others, why put your hand in their sludge. Why you need money from them? Can you accept other things from them too?
@Ahmer:
There is no solution. End of story.
@Faruk Bhatti:
That would be excellent. You need to convert some of Pakistan that looks like desert. And to start with you can change your name to faruk al bhatti, to give an arabian touch. The fact that Arabs call you Miskeen , is another matter.
The biggest barrier to export to India are the non tariff barriers which are a great impediment to increasing our export to India. If India is sincere than these should be removed immediately for Pakistani imports.
Also another factor not mentioned in the article is the impact on Pakistan's nascent technology sector which will either benefit from a technologically superior and a significant global player as India or will be completely gutted due to strong competition from India.
Pakistan will not benefit from free trade with India in present condition of energy and law and order. Pakistani manufacturing is extremely distressed with several hours of labor loss due to load shedding. First Pakistan remove impediments to its Industrial production only then go for any trade agreement with India. Pakistani manufacturer rely on local market to cover its high cost of production once that market is lost to cheap Indian products the higher cost and high competition will collapse the small industry in Pakistan.
@Ali: Slightly naive comment. The manufacturing base in the U.S. has not recovered from loss of manufacturing jobs to China. The state and federal government of the U.S. continues to offer various kinds of assistance to manufacturers in form of financial grants, investment tax credits, job creation related tax credits, etc. This is because of the "... chinese government not playing fair....", as per the U.S. and artifically lowering Chinese Yuan against $$ along with "other tactics". The developed nations are focusing towards advanced manfuacturing and shying away from low-margin, low value-add manufacturing, as a way to replace loss of manufacturing to BRIC, mainly China. The growth in service sector inearly two thousands provided significant shift and a temporary relief in job losses.
The industry associations, and government departments should complete their homework and coordinate better. Pakistan opened trade with China, what has happened. Dumping of quality as well as substandard Chinese products flooded the Pak market. Many manufacturers have cloesd shops. Several more are thinking of closing theirs. The government departments, failed to have checks and balances in place to avoid dumping of Chinese products in the PAK market. Plus, the chinese manufacturers enjoy highly competitive energy costs combined with other incentives. Pakistan must ask herslef, does the country want to have a strong manufacturing base, or let others do the manufacturing while Pakistanis focus on importing and trading..
I am open to trade with India, as long as it is bilateral and fair for both. However, there is NOTHING wrong with backing away if the government and systems are unprepared. I believe the country is GROSSLY underprepared for opening trade. Not making internal progress on this issue would be a sin too.
Make sure Sugar export from Pakistan to India takes priority that is where Sharif family has vested interest.
@gagan sarkar "And to start with you can change your name to faruk al bhatti, to give an arabian touch. The fact that Arabs call you Miskeen , is another matter." Anything associated with Arabs is a source of pride for Pakistanis. If he changes his name he should change it to Miskeen Farukh-el-bhatti.