Pakistan-India Trade:

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The Pakistan-India Trade Relationship: Prospects, Profits, and Pitfalls favor more trade is the strong “historical memory” prevailing in the western Indian states bordering Pakistan. Here, people fondly remember the trade corridors and other economic linkages with present-day Punjab province in Pakistan—links that flourished pre-Partition and persevered until the Pakistan-India war of 1965. Virmani calls on Indians and Pakistanis to better publicize the positive dimensions of bilateral trade. These include the fact that more trade would eliminate the “deadweight loss” resulting from diverting commerce to third countries. Additionally, using examples from the free trade agreement between India and Sri Lanka, he discusses how nations can enjoy new advantages of economies of scale. Sri Lankan tea exporters were long shut out of India, one of the world’s largest producers. Now, however, they can easily “test” their products in southern India; many have now established operations and brands in Tamil Nadu state. The risKs of Trade norMaliZaTion There is, however, another side to this story. Economists often say that free trade creates both winners and losers. Indeed, numerous sectors and interests in Pakistan have expressed strong misgivings about increased trade with India. Particularly outspoken in its opposition is the Pakistani automobile industry, which had more items on the negative list (385, according to data provided in this volume) than any other sector. In late 2012, the chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers warned that local car parts makers “will be hurt significantly” by trade liberalization because the “nascent industry” cannot compete with India’s formidable auto sector. He called on Islamabad to wait at least 10 years before lowering tariff lines in this sector. 4 Some agricultural interests are unhappy as well. A 2012 Foreign Policy report found Pakistani farmers worried about the prospect of heavily subsidized (and hence cheaper) food imports coursing into Pakistan from India. (However, in the same report, other food producers relished the prospect of acquiring better-quality foodstuffs from India, because of their expected profitability in Pakistani food markets.) A major concern of farmers is that agricultural trade will not serve Pakistan’s comparative advantage; | 5 |
Michael Kugelman some food wholesalers fear that India will flood Pakistani markets with bananas and oranges, which already exist in abundance in Pakistan. 5 Similar concerns were voiced in focus group consultations with business leaders overseen by Karachi’s Institute of Business Administration (IBA) in early 2012. Ishrat Husain, IBA’s dean and director, highlights the findings from these conversations in his essay. He writes of agricultural producers’ fears that they will be unable to compete with their Indian counterparts, who in some states benefit from “hidden and implicit” subsidies (including for electricity to power tubewells). Meanwhile, car parts manufacturers are anxious that Indian parts “will flood the Pakistani market and decimate the local industry,” and that Pakistani exports will suffer because Indian car makers prefer domestically manufactured parts. Husain also reports unease within the pharmaceutical and chemical/synthetic fiber industries. The first sector believes that India’s abundance of raw materials and large economies of scale will “squeeze out” Pakistani products, while the second predicts that India, with such a large surplus of fiber, will simply dump its excess in Pakistani markets. Husain also discusses factors beyond sectoral opposition that risk derailing the Pakistan-India trade regime. First, opposition political parties in both countries, possibly aligned with “extremist elements,” could take virulently anti-trade positions that pressure Islamabad and New Delhi into supporting less trade-friendly policies. Second, the “losers lobby”—powerful industries in both nations that feel threatened by greater trade— could prevail on their governments to impose retaliatory trade measures. Finally, the powerful Pakistani and Indian media could take up the cause of smaller industries that suffer from trade liberalization, and “create such venom that trade flows could be set back.” Given these risks, Husain concludes, it is essential that both sides are proactive in their management of trade policies and processes, and vigilant in their implementation. naViGaTinG non-Tariff Barriers Free trade, not to mention a full-fledged MFN relationship, requires not only the simple exchange of low-tariff goods, but also the smooth and unfettered flow of goods within countries and across borders—a rarity in South Asia. Indeed, several contributors to this volume express | 6 |
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