India-Pakistan Trade Ties

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Context: The Pakistani government's recent reversal on partial trade resumption with India demonstrated how geopolitical considerations, rather than economic or rational considerations, drive policymaking.

Relevance:GS-II: India and its neighbourhood- relations.


India-Pakistan Bilateral Trade: Past, Present & Future

International trade is critical to the economic development of both developed and developing countries. Most countries liberalized their trade in the last three decades, particularly during the 1990s and 2000s, as part of economic reforms implemented by them and facilitated by WTO policies. The emergence of regional groupings, particularly bilateral trade relations, in every part of the world trading system is one of the most significant developments in the field of international trade.

But the potential of Indian-Pakistan bilateral trade has yet to materialize. If ‘normal' relations are established, India-Pakistan trade could more than double to US$10 billion in the next few years.

History of India-Pakistan bilateral trade

  • Bilateral trade relations between India and Pakistan have been the subject of a checked history over the past seven decades, reflective of the changing dimensions of geopolitical tensions and diplomatic links.
  • In 1948-49, India accounted for more than 70% of Pakistan's trade transactions, with 63% of Indian exports to Pakistan. However, by the end of 1949, Indo-Pak trade relations had rapidly deteriorated.
  • While 11 Indo-Pak Trade and Payments Agreements were signed between May 1948 and March 1960, bilateral official trade fell from Rs. 184.06 crore in 1948-49 to Rs. 13.63 crore in 1958 and to an all-time low of Rs.10.53 crore in 1965-66.
  • Following the 1965 war, India and Pakistan imposed a trade embargo that lasted until 1974. Several attempts were made by India to restart the trade during this period, but no concrete results were achieved.
  • On November 30, 1974, a trade protocol (Shimla Agreement) was concluded, allowing the trade embargo to be lifted with effect from December 7, 1974.
  • Pakistan participated in the Delhi International Trade Fair in November and December 1981. Following that, the two neighbours exchanged trade delegations in fast succession.
  • A Joint Business Commission was established in June 1983 with the primary goal of expediting the decision-making process on matters requiring government approval and recommending new products for bilateral trade.
  • India and Pakistan signed the final document of the South Asian Association for Regional Cooperation (SAARC) in 1986, pledging to support the welfare of South Asia's citizens.
  • In December 1995, the South Asian Preferential Trading Agreement (SAPTA) was signed, establishing an integrative trading arrangement in the region. A total of 5550 tariff lines have been included for tariff concessions after three rounds of trade negotiations.
  • In 1996, India granted Pakistan the title of Most Favoured Nation (MFN). Pakistan expanded its positive list of products that can be legally imported from India to 600 in the same year.
  • Pakistan's Prime Minister announced the addition of 78 new things to the optimistic list in 2003. Chemicals, minerals, and metal products are among the most allowable elements. Cardamom and tea, for example, continue to have high tariffs.
  • India's trade complementarity index (TCI) was 50% in 2003, while Pakistan's TCI with India was just 14%. Pakistan's TCI with India was highest in 2007, and India's TCI with Pakistan was highest in 2010, indicating that Pakistan's complementarity with India has improved, which is a good sign for Pakistan.

Trade Complementarity Index

  • The trade complementarity (TC) index can provide useful information on prospects for intraregional trade in that it shows how well the structures of a country’s imports and exports match. It also has the attraction that its values for countries considering the formation of a regional trade agreement can be compared with others that have formed or tried to form similar arrangements.
  • The TC between countries k and j is defined as TCij = 100(1 – sum(|mik – xij| / 2)) Where xij is the share of good i in global exports of country j and mik is the share of good i in all imports of country k.
  • The index is zero when no goods are exported by one country or imported by the other and 100 when the export and import shares exactly match.
  • Both countries agreed to discuss the new shipping protocol, air service deregulations, joint registration of basmati rice, an increase in the size of Pakistan's positive list, India's proposals for information-technology-related medical services and export insurance, and work on a memorandum of understanding during the third round of Composite Dialogue process discussions in March 2006.
  • With the assistance of two British visitors, a “Friends Without Borders” scheme was launched in 2006. The plan was for Indian and Pakistani children to become pen pals and write each other fun letters. In both nations, the concept was so common that the organization found it “impossible to keep up.”
  • After the early 2010 elections in both India and Pakistan, some efforts have been made to improve ties, including the establishment of a consensus on the agreement of Non-Discriminatory Market Access on Reciprocal Basis (NDMARB) status for each other, which will liberalize trade.
  • Both countries agreed to build mechanisms to resolve issues of non-tariff barriers during the 6th Round of Commerce Secretary Level Talks in November 2011 in New Delhi. Customs Cooperation Agreement, Mutual Recognition Agreement, and Redressal of Trade Grievances Agreement are the three agreements that the two countries have signed.
  • Pakistan has not yet granted India the status of the most favored nation (MFN). India's tariff and non-tariff barriers, on the other hand, are substantial. Poor transportation links make trade expensive, with insufficient railway and road connections and restricted port facilities, as well as bureaucratic regulations and restrictions, limiting sea shipments.
  • Following the Indian Parliament's approval of the Jammu and Kashmir Reorganisation Bill, which revoked Jammu and Kashmir's special status, further tensions between the two countries arose, with Pakistan downgrading diplomatic relations, closing its airspace, and halting bilateral trade with India.

Trade relations just before revoking the special status:

  • Trade between the subcontinental neighbours has always been linked to their political interactions, given their tumultuous relationship.
  • For instance, India’s exports to Pakistan dropped by around 16% to $1.82 billion in the 2016-17 financial year from $2.17 billion in 2015-16.
  • This coincided with the rise in tensions between the two countries following the terrorist attacks in Uri in 2016 and the surgical strikes by India against Pakistan-based militants.
  • rade between the two countries grew marginally in subsequent years despite continuing tensions, With India’s exports to Pakistan increasing nearly 6% to $1.92 billion in 2017-18, and by around 7% to $2.07 billion in 2018-19.
  • Imports from Pakistan, though much lower than India’s exports to the country, also increased by 7.5% to $488.56 million in 2017-18 from $454.49 million in 2016-17.
  • Growth of imports from Pakistan slowed to around $494.87 million in 2018-19 — an increase of around 1% — before political relations between the two countries took a turn for the worse in 2019.

Why did Pakistan ban trade with India?

  • Pakistan’s decision to suspend bilateral trade with India in August 2019 was primarily a fallout of India’s decision to scrap Article 370. Pakistan called the move “illegal”, and took this trade measure as a way of showing its dissatisfaction
  • However, an underlying reason for suspending trade between the two countries was also the 200% tariff imposed by New Delhi, A move that India implemented earlier that year after revoking its status as a Most Favoured Nation following the suicide bomb attack on the CRPF in Pulwama.
  • Pakistan’s announcement, coupled with India’s decision to revoke its MFN status and hike duties on its goods, Were considered by some experts to be one of the most drastic trade measures taken in the souring diplomatic relations between the nations.
  • Trade between the two countries suffered greatly in 2019-20, with India’s exports to Pakistan dropping nearly 60.5% to $816.62 million, and its imports plummeting around 97% to $13.97 million.
Suggestions for strengthening India-Pakistan bilateral trade 
  • As a trade facilitation initiative, India and Pakistan should grant MFN status to one another. India already granted MFN status to Pakistan in 1996 ( revoked recently).
  • The volume of informal trade is larger than formal trade; official trade can flourish due to regularizing the unofficial trade by improving trade infrastructure and bringing the items, which are being traded unofficially into the official tradable list.
  • The promotion of trade and commerce, as well as the movement of goods, services, and people, needs efficient and cost-effective transportation and communication.
  • Easing the complexities of visa procedures, which should be considered by both countries.
  • Increased bilateral trade allows producers in both countries to seek price efficiencies by providing lower-cost inputs to one another.
  • Enhanced trade cooperation can also mean lower prices for millions of consumers. Given this advantage, both countries can jointly fight poverty deprivation, hunger, and inequality.
  • Bilateral trade between both countries will also result in more public revenues since governments can earn more through custom revenues when smuggled items switch to formal trade.
  • India and Pakistan should create an atmosphere of peace to boost trade. Investment and major ventures can take place in a big way if both sides are able to create an enabling political environment of peace, trust, and confidence.
  • Progress in trade and economic cooperation with India and Pakistan would need a firm and continuous commitment from Pakistani authorities.
  • India and Pakistan can learn from the global experience, where trade is increasingly being used as a prelude to age-old geopolitical tensions reconciliation of the Sino-American trade relations offer a convincing example of how trade can be skillfully used to enhance mutual confidence between two politically hostile nations.

Way Forward

  • Trade between India and Pakistan has always been hostage to their hostile relationship. For years, Pakistan traded with India on the basis of a positive list, changing to a negative list only in 2009. Other efforts to ease trade have been unsuccessful, including a 2011 push by Pakistan to reciprocate India’s grant of MFN.
  • The economic impact of the India-Pakistan trade suspension since 2019 has been significant in border economies like Amritsar. Annual bilateral trade of around $2.5 billion is the minimum that could not be realized during the suspension period. This loss also has a spillover effect on other stakeholders.
  • Labourers at the border crossing lost their livelihoods, transporters, clearing agents, restaurants, workshops, all got impacted.
  • Furthermore, Pakistan should not mix geopolitics and economic trade, as this would result in a messed-up situation in the region. To improve bilateral trade, India and Pakistan should collaborate on SAARC and SAFTA.

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