Pakistan-India Trade:

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Pakistan’s Trade with India: Thinking Strategically is on the rise in Pakistan also for the same purpose—i.e., to protect monopoly/oligopoly producers of intermediate goods. As in India, such protection raises the production costs of downstream small and mediumsized firms. The use of anti-dumping to protect local monopolies lowers welfare gains from trade and must be reviewed for its efficacy. Gainers and Losers from Trade with India A number of studies 6 have carried out careful analyses of gainers and losers from liberalizing trade with India. The studies conclude: • Pakistani consumers will be unequivocally better off as seasonal price hikes will be brought under control via access to a much larger market. Costs of most consumer products will fall and the variety available will increase. It will also help moderate inflation, which affects the poor disproportionately and contributes to political instability. • Farmers will benefit from exchanges on technical know-how, since the benefits of such exchanges can be easily conveyed across our long common border. This will help boost farm productivity and lower costs of production for Pakistani manufacturers, making them more competitive internationally. Furthermore, rural incomes will rise, which will help lower rural poverty and ameliorate political tensions in the rural areas. • Small manufacturers will be able to enjoy potential sub-contracting arrangements with larger Indian manufacturers, which will help increase their efficiency. Pakistan’s industrial clusters of small manufacturers in Sialkot, Gujranwala, Gujrat, Faisalabad, and Hyderabad will be the chief beneficiaries, enjoying scale advantages of producing for a much larger South Asia-wide market. • Some large-scale manufacturers who enjoy monopoly power in the Pakistani market and are subsidized by the government will be adversely affected in the short run. On the other hand, more dynamic producers will become more competitive, | 45 |
Ijaz Nabi which will boost Pakistan’s exports in the international market. Liberalization will also allow commodities apart from textiles to enter into the trade mix, providing sectors other than textiles an opportunity to grow. • Lastly, the government will be better off because legalized trade will generate tax revenues now lost to smuggling. The best way of compensating any losers from a change in the trade regime with India entails the use of fiscal instruments. Government revenues, enhanced via tariffs on normal trade with India but particularly importantly, a modern consumption tax (such as the valued added tax, or VAT, or the improved generalized sales tax) levied on legalized trade with India, would generate the revenues for financing compensation measures. National Security and Stop-Go India-Pakistan Trade Economic liberalization with India may help allay security concerns that have prevented trade from flourishing. Opening up trade and two-way investment flows will create stakeholders on both sides of the border who will lobby for keeping the overall relationship between India and Pakistan on an even keel. The Pakistan Business Council estimates that trade volumes in the range of $10 to $15 billion will be the tipping point, making the gains from trade large enough for economic wellbeing to outweigh geostrategic preoccupations. SAFTA, ECO, China, and Pakistan The calculus of costs and benefits of liberalizing bilateral India-Pakistan economic relations pales in comparison to the potentially huge benefits of seeing that opening in the context of Pakistan’s international role, given its location as the connector of regional powerhouses. The resource-rich ECO (the Economic Cooperation Organization, comprising Central Asia, Iran, and Turkey) and manpower-rich South Asian Free Trade Area (SAFTA) are naturally complementary regions. Together they can turn this land of nearly 2 billion people into an economic power and reclaim its historical position as a cultural hub. Pakistan | 46 |
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