The barrier to trade
The barrier to trade Print
Politics
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By Mubarak Zeb Khan

 

Talks between Pakistan and India on trade liberalisation have certainly gained traction, with the former agreeing to further open its market to the latter by February 2012. Yet the willingness shown informally by the two neighbours is still dogged by old rivalries and self-interest that would restrict access to the market. What is holding back real liberalisation? Is it a matter of clashing national interests, as perceived by the ‘establishment’, or is it the vested interests of the business elites in each country?

 

Originally published by Dawn

  

In Pakistan, the pros and cons of a liberal trade regime with India have been discussed over the past two decades, yet the issue remains problematic for policymakers. Such discussions have traditionally been dominated by traders and businessmen.

 

Since traders outnumber the manufacturers, they call the shots in public policymaking. Naturally, they care more for promoting trade as compared to protecting the interests of local industries.

 

Trade liberalisation with India is not blocked by the so-called ‘establishment’. In fact, the business elite prevails over policymakers — and never talks about the profits made behind trade protection walls. The manufacturers have nothing to do
with the political issues of the country but want to protect their own interests.

 

To the public it is the ‘establishment’, or the Kashmir issue, that appears to be standing in the way. But there is need to clarify some of the myths and misgivings about trade relations with India.

 

Pakistan started off as a raw material and food producing country. It had a meagre industrial base since its landmass had supplied raw material — cotton and jute — to industries located elsewhere. In return, it got basic consumer goods.

 

Soon after Partition, India put in place a trade embargo against Pakistan because the latter did not follow the former in devaluing its currency against the pound sterling. Instead of hurting the fledgling nation, the action pushed it towards industrialisation. As a result, local industries evolved in Pakistan and prospered as they monopolised consumer markets until 1974. At that stage, the business class of neither country talked about opening the home market to foreign goods, favouring protectionism instead.

 

Things started changing in the 1980s when Pakistan finally got in step with the global trend of deregulation of national economies. Neo-liberal economists sold a new policy to the then government to provide a level field to domestic and foreign players; the government started bringing down the protective walls by reducing customs duties on items not produced locally.

 

This encouraged the business elite to successfully lobby with the government to allow the import of certain products from India, which were placed on the positive list. The government kept increasing the items on the list: in 1986, the positive list contained 42 items; by 1995, the list had grown to 577 items. India was trading with Pakistan on selected items on the positive list until 1996, when it saw fit to grant Pakistan the Most Favoured Nation (MFN) status, or non-discriminatory treatment on trade.

 

Since then, however, India has made the MFN issue the subject of intense debate based on political rather than purely trade and economic factors. Although India did open up its market to Pakistani goods, it raised hidden non-tariff barriers as well which restricted import flows. Indian businessmen seek free markets for themselves but are unwilling to open up their own to competition. They want to prosper behind high non-tariff walls and present a good image internationally by reducing custom duties.

 

Pakistan, by contrast, is cast in a bad light because it has slightly higher duties, regardless of the fact that it has not raised any non-tariff barriers.

 

Although both countries have allowed mutual trade under the special provisions of the WTO agreement, India — in the interest of its businessmen — has blocked Pakistan’s entry into the Asia-Pacific Agreement (APTA), and opposed its entry into the Bay of Bengal Initiatives for Multi-Sectoral Technical and Economic Cooperation.

 

These agreements allow preferential trading among South Asian and Far East Asian countries. Similar opposition was witnessed from India since 2002, when the European Union was considering granting trade packages to Pakistan.

 

It would be unfair to accuse Islamabad alone of hindering the trade liberalisation process. New Delhi has more to answer for.

 

And even if not, at least both share the blame as the wishes of their business elites weigh more with the two governments than common prosperity.

 

Accusing the Pakistani establishment of dragging its heels is pointless. Items get added to the positive list when it is required, after all. The list, currently at 1,946 products, gets lengthier under the very same establishment. In actuality, the number of these items is much greater if we disaggregate several groups of items lumped together under tariff headings. As a result, Pakistan has diverted international trade worth more than $5bn towards India in the past few years.

 

Any given two countries trade mainly in, at best, 50 to 100 items and the rest is generally minor trade or no trade at all. India already enjoys MFN status on these items. And trade on a positive-list basis with India is one of the non-tariff barriers of
Pakistan, like many more in India.

 

Pakistan does provide the MFN facility to India, though not fully. It may not be true technically that Pakistan has not meted out non-discriminatory treatment on trade to India. But the name of the game is the non-tariff barrier where India has a far greater institutional capacity. It is up to India to decide how to minimise these barriers which protect the interests of certain business elites in that country. It is up to Pakistan to give complete access to all products, including automobiles, pharmaceuticals and textiles.

 
Comments (1)
India and Pakistan trading and opening up borders be a good idea
1 Monday, 19 December 2011 14:32
doran
That would be a massive step in the right direction re enabling economic and social development and stabilisation within the region. Would mean the haters and war mongers on both sides having to be restricted though and moderates and liberals empowered.