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India-Pakistan trade stuck on SAFTA

Nirupama Subramanian

CAN TRADE improve relations between hostile countries, or are better trade relations between two countries possible only after settlement of all disputes? China and Japan have shown they can have good trade relations despite long-standing differences. In the case of India and Pakistan, the question is far from settled.

Pakistan, a signatory of the South Asia Free Trade Agreement, which went operational on July 1, has said that with India, it will implement the agreement only in line with its existing bilateral trade policy. That means, Pakistan's trade with India will continue to be governed by a positive list, which allows only 773 items to be imported from India. Only on these will Pakistan reduce tariffs in line with SAFTA. India also wants Pakistan to give it Most Favoured Nation status. That would have become a non-issue had Pakistan implemented SAFTA fully for India.

Underlying Pakistan's refusal to do so is the argument that liberalisation of trade has to be linked to progress on resolution of long-standing disputes between the two countries, the "core" issue being that of Kashmir. Pakistan dismisses New Delhi's position that trade must not be held hostage to the settlement of a long-standing problem.

So it is surprising that the State Bank of Pakistan — the country's central bank — decided recently to put out a report that departs from this traditional argument. The report and its conclusions bear no relation to Pakistan's official trade policy with India.

The report, which was released on July 10, says Pakistan stands to save between $400 million and $900 million on its import bill if it would expand the positive list and allow imports from India of goods that it presently imports from other countries at higher cost. There are 2,646 items that are common in Pakistan's imports and Indian exports. The report, based on 2003-2004 data, says that after excluding the items that are on the positive list for India, 45 per cent of the items could be imported by Pakistan at lesser cost from India than the current cost of import from the rest of the world.

For instance, in the iron and steel sector, the report says Indian imports are on the whole not as cheap as Iran's. But it identifies 47 products that are cheaper to import from India.

It also points to chemicals and pharmaceutical products. In these sectors, Pakistan's imports from India were 4.3 per cent and 6.8 per cent respectively, of its total imports in these sectors. As many as 166 of these items cost less to import from India than from other countries.

For sure, the paper argues that trade liberalisation is not a one-way street and points to tariff and non-tariff barriers in India that discourage Pakistani exporters, despite India having given the MFN status to Pakistan as far back as 1996. It says that unless these barriers are brought down, Pakistan cannot gain from bilateral trade, the potential for which, according to estimates, ranges from $0.75 billion to $6.25 billion.

In 2005-2006, bilateral trade was over $800 million, more than double what it was in 2003-2004. Informal trade could be as high as $2 billion.

"Complete elimination of tariffs under SAFTA may increase the intra-regional trade by 1.6 times the existing level. At the aggregate level, Pakistan and India could increase their bilateral trade by 79 percent, by entering a PTA [preferential trade agreement]."

Positive spin-off

Most surprisingly, the report asserts that an increase in trade links will have a positive spin-off for the troubled relations between the two countries.

This is also India's position. But the Pakistan commerce ministry seems unimpressed by the report. When Commerce Minister Humayun Akhtar Khan recently announced the country's trade policy for 2007, he said trade with India would continue under the existing regime. He said equal treatment with India under SAFTA would not be possible "until there is progress towards resolution of some political disputes between the two countries including the Kashmir issue."

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