Pakistan India trade

Written by Sarmad Ishfaq 6:44 pm

Pakistan-India Trade: Potential and Pitfalls

Despite the massive potential, trade between Pakistan and India has historically been plagued by many problems – which have increased further in recent times. The article expounds the trade-related problems between both countries from high tariffs to sub-par infrastructure. It also discusses the potential and problems of the intra-LoC trade in Kashmir.

Introduction

It seems preposterous to deliberate on the liberalization of Pakistan-India trade these days as tensions have peaked between both countries. The main reason for such indignant relations between the neighbors is the Bharatiya Janata Party’s (BJP) ignominious treatment of Kashmiris in Jammu & Kashmir (J&K) (Ganguly, 2019). Not to mention India revoking article 370 and 35a from the constitution which granted special privileges and a degree of autonomy to Jammu & Kashmir. Due to this, J&K is no longer a state in India and has been split into two federal territories. Moreover, the international community has not just clamored about the human rights abuses of the Kashmiri people, but also of other Muslims and minorities in Modi’s India (Chacko & Talukdar, 2020). The other issue, the coronavirus, is a global one that has effectively closed almost all borders around the world. d

Regardless, this paper aims to highlight the benefits of free and fair trade between Pakistan and India. It discusses what the major hindrances are vis-à-vis trade and what steps need to be taken to improve trading flows. The paper also sheds light on how modern-day trade between Pakistan and India is merely a drop in the bucket – and that the boons of trade can be extremely auspicious for both countries. Perhaps most importantly, it also delineates the now-defunct intra-LoC (Line of Control) trade that had greatly benefited the forgotten Kashmiris on both sides.

Pakistan-India Trade – An Overview and the Issues

Trade can undoubtedly be a great equalizer for both countries, but unfortunately, the true potential of trade has not been realized between both countries. Trade between Pakistan and India merely scratches the proverbial surface. Although, improvements in recent years have been made, much more is possible not only to increase economic gains but with it creating cultural links on a bilateral level – which truly is priceless. Pakistan and Indian trade takes place on three levels – official, illegal, and indirect. Official trade is trade recognized by both countries and through legitimate channels. Illegal trade consists of the goods smuggled through mainly the land border between both countries while indirect trade takes place through third countries. Indirect trade through Dubai (primarily), Singapore, Iran etcetera amounts to around $2 billion. Both countries would benefit greatly if indirect trade was formalized.

Bilateral trade in 2003-04 was a mere $345 million, but steadily this number increased. In 2015-2016, the total trade amounted to $2.612 billion according to the Annual Report of the Indian Ministry of Commerce and Industry (2016-2017). The trade balance unsurprisingly is heavily in favor of India with Indian exports to Pakistan (in 2015-2016) valuing $2.171 billion and Indian imports from Pakistan totaling $441 million only. Although, this trade deficit should not hinder the trade between both countries, as it is a win-win situation according to Ishrat Hussain, former governor of State Bank of Pakistan (Syed, 2012). However, due to India abrogating article 370 (mentioned above), Pakistan was forced to suspend bilateral trade with their neighbor in August 2019, which conspicuously hurt trading numbers. Although this move has not brought trade between the neighbors to zero, it has nonetheless drastically decreased it. For example, Indian exports to Pakistan amounting to 8.303 billion Indian Rupees (INR) in July 2019 fell to a meager 0.8868 billion INR in September of the same year (“India Exports to Pakistan”, 2020)

MFN, High Tariffs, & Non-Tariff Barriers

Pakistan-India trade is pegged to two major issues – Pakistan granting MFN (most favored nation) status to India and the latter removing non-tariff barriers (NTBs) on Pakistani goods (Taneja, Prakash, & Kalita, 2011). Hassan, Javaid, and Majid (2014) reinforce that the two main reasons quoted for feeble trading relations are Pakistan’s reluctance to grant India the MFN status and the existence of non-tariff barriers (NTBs) in each country. MFN means that the grantor country promises, for the sake of better trade, lower tariffs, or high import quotas to the grantee country. There was a lot of debate around Pakistan granting India MFN status around 2012 but things never panned out (Imran, 2020). Unfortunately, India removed Pakistan’s MFN status in 2019 while Pakistan has never given MFN status to India.

Conversely, tariff barriers entail high taxes or customs levied on goods entering a country, while NTBs include red tape, cumbersome regulations, unfair rules etcetera that hinders trade. High tariffs and NTBs arising from political tensions severely impede trade progress (Choudhri, Marasco, & Nabi, 2017). Taneja et al. (2011) note that granting India the MFN status and minimizing NTBs will augment market access for both states. There is no doubt that free and fair trade would greatly benefit both countries. Although free trade initiatives like the South Asian Free Trade Agreement (SAFTA) exist under the aegis of the South Asian Association for Regional Cooperation (SAARC), the extent of trade enjoyed bilaterally is hardly “free and fair”. The overwrought relations between both countries have played a key role in deterring the sound execution of SAFTA and other regional trade initiatives (Taneja, Dayal, & Bimal, 2017). Economists and scholars alike are certain that MFN status should be granted and the system of lists (mentioned ahead) should be terminated.

Positive, Negative, and Sensitive Lists

Due to both countries’ history of maintaining positive, negative, and sensitive lists with respect to what can and cannot be traded, the true potential of trade suffers. According to a study done by Taneja et al. (2017), they found that the trade potential of both countries was an estimated $10.9 billion with import potential accounting for $3 billion, while export potential being $7.9 billion. Others suggest even higher numbers – for example, Indian High Commissioner Ajay Bisaria, stated that liberalizing the visa regime, normalizing relations and removal of non-tariff barriers can increase trade to $30 billion (“Indian envoy says bilateral…”, 2018).

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Pakistan’s negative list consists of 1,209 items mainly from the auto, electrical machinery, steel, pharmaceuticals, and textiles sector. Pakistan’s negative list primarily protects its automobile and auto-component industry from Indian imports (Taneja, Mehra, Mukherjee, Bimal, & Dayal, 2013). India conversely protects its clothing and textile industry to an extreme degree from Pakistani imports – high duties and tariffs are placed on ready-made goods to protect the domestic textile industry. Taneja et al. (2017) counter these concerns by stating that Pakistan can benefit from cheaper automobile imports from India as it would provide lower-cost substitutes compared to imports from Thailand and Japan. Furthermore, they state that although India is fearful that Pakistan’s strong fabric and yarn manufacturing industry will hurt their small to medium scale sector, in reality, imports from Pakistan are more likely to compete with the mill sector rather than the power loom sector in India. Therefore, there is no justification to shield large companies from Pakistani imports. Taneja et al. (2011) note that the positive list approach is befuddled with uncertainties and lacks transparency for traders and leads to higher transaction costs – therefore it should be removed.

Moreover, trade liberalization of other items is also beneficial for both countries. India exports many items that Pakistan exports from further off countries (such as sugar, petroleum products, tea, electrical generating sets etcetera), and so Pakistan can save a lot in terms of transportation costs if it starts importing these goods from India (Nelson, 2017). Conversely, Pakistan can increase exports of wheat, cement, surgical instruments, and other items, which India exports from other countries – this could be a boon for Pakistan’s export market and would benefit India due to cheaper transport costs.

Government to business contacts should also be increased to provide information to traders and companies in Pakistan and India about what the trading policies of the respective countries are, what the benefits to them would be and so on. These kinds of seminars and fairs have worked well in the past and should be continued on a larger scale to remove any misconceptions about Pakistan-India trade among the business community.

Infrastructural and Security Concerns

Trade liberalization with one another in a globalized world is indeed logical but inadequate infrastructural and transport facilities inhibit the effective flow of trade between countries. Addressing infrastructural constraints and reforming transportation protocols would improve bilateral trade immensely. Roads connecting both countries are not only limited but also underdeveloped while air and rail travel has been subject to inconsistencies due to the political climate (Dash, 2013). Although new facilities have been added for cross-border road transport, the infrastructure on the land routes is not up to international standards (Taneja et al., 2013).

Currently, there is only a singular operating land route, which runs through the Attari-Wagah border in Punjab for the transportation of goods between the countries. The facilities here are not up to par for clearing, storage, and handling of goods – especially perishable ones. Furthermore, since the security checks here are done manually, it is extremely tedious and time-consuming to unload and reload trucks. Even though an Integrated Checkpost (ICP) was launched in 2012 at the Attari-Wagah border, which included a separate trade gate for cargo trucks, parking space, CCTV cameras, and cargo storage, the trade facilities were still predominantly manual and time-consuming. Since 2012, these facilities have become exceptionally anachronistic.

Furthermore, there is a high-security concern on both sides of the border of illegal and dangerous goods (narcotics, weapons, ammunition etcetera) entering into one country from the other side. The security agencies on both sides are therefore sometimes skeptical of opening the border completely for goods and people. Security is a legitimate concern but the solution should not be one that undermines trade. For years, Pakistani and Indian businesspersons have lobbied their respective governments to improve trade relations and reduce border disruptions, which range from bureaucratic inhibitions to harassment by security forces troubled with the cross-border activities (Briskey, 2018). In the aftermath of 9/11, the debate on balancing trade and security became visibly prominent. This was a laborious challenge but one that has been tackled by many different nations commendably (discussed below). Innovations and mechanisms were adopted by various countries to ensure security remains uncompromised and that trade flows unabated. Pakistan and India should learn from the international community and set up a copacetic border system that ensures both nations’ economic and security concerns.

For example, although America and Mexico have strong trading relations, they have suffered not only due to drugs, human trafficking, and other contraband mainly coming from Mexico to America, but also because of old infrastructure and manualized trade processes. To put things into perspective, as of 2005, the delays in clearing freight-carrying trucks across the America-Mexico border cost the countries $6 billion and more than 51,000 jobs (Smart Borders, 2014).  Due to this, there has been a need to conduct border security in a less bureaucratic manner that concurrently does not encumber trade. In response to this predicament, the American and Mexican governments launched the Unified Cargo Processing (UCP) program. According to Dibble (2017), this program has proven successful in different areas of the U.S.-Mexico border such as Douglas, Nogales, San Luis etcetera as wait times have reduced as much as 85%. The program has custom officials of both America and Mexico working jointly vis-à-vis inspection of cargo. The officials of both countries simultaneously inspect cargo hence eliminating dual checks on both sides of the border. The program was launched to enhance trade by reducing wait times and underpin national security by increasing the effectiveness of security checks.

Automation of processes is also imperative when developing an innovative border system. The next step for America and Mexico and for other countries is to adopt automation technologies as these platforms and processes help maintain strong border security, keep people safe, and help promote trade – automation also helps reduce costs and risk (Ruda, 2016). Sierra Leone and Guinea have done something similar by initiating a “one-stop” joint border post. Furthermore, they have also initiated automation processes by providing businesses with software through which submission and processing of trade-related documents now takes place – manual declarations are no longer entertained (Dumbuya, 2015).

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Other automation techniques include the installation of the latest infrastructure such as X-ray or gamma-ray truck scanners (cargo scanners), video surveillance systems, weighbridges, and the latest computers. Recently, the Ugandan government realized the importance of reducing manual functions and bought 1.5 billion Ugandan Shillings worth of cargo scanners from China. These latest technology cargo/truck scanners at the Busia-Malaba border are intended to increase security and improve trade and can handle 200 trucks in one hour (“Safer Border Trade…”, 2018). Private companies like Cotecna can also be hired that work with governments around the world to supply, finance, install, operate, and even maintain an integrated border system based on cargo scanning (non-intrusive inspection) technologies (“Successful Enhancement of…”, 2017). To combat the illegal trade of narcotics and weapons, the government of El Salvador signed a 10-year 100% scanning contract with Cotecna, which generated an additional $4.6 million in only a month and resulted in better security due to more detections (“Successful Enhancement of…”, 2017).

Regarding Pakistan and India, Briskey (2018) asserts that security problems ranging from specters to actual attacks have notoriously undercut what should be a mutually beneficial trading partnership between both neighbors. Pakistan and India should take inspiration from these innovations around the world and should look to confront this problem to increase trade while not compromising upon security. Only recently (in 2018) has India finally decided to add full-body truck scanners to the Attari ICP (which was running without any truck scanner since the ICP’s inception in 2012) and have also replaced old cameras with high definition CCTV cameras (Sharma, 2018). Actions like these are of utmost significance but a coordinated effort into improving both sides of the Attari-Wagah border would be more beneficial instead of a disjointed one.

Pakistan and India should mutually decide on border requirements (whether that involves a joint-border system, surveillance system, cargo scanners, better storage, more parking etcetera) and implement it in a coordinated fashion – similar to how they incepted the ICP in 2012. Both countries should also enforce strict fines on smuggling and other illegal activities on the border. For example, under the new reforms at the Guniea-Siera Leone border, those found guilty of making false declarations and/or smuggling will pay a fine twice the value of the duty on the imported goods; repeat offenders will pay greater fines (Dumbuya, 2015).

Intra-LoC Trade in Kashmir

Although intra-LoC trade has now been suspended by India’s BJP government, it was fruitful for Kashmiris while it lasted from October 2008 to mid-2019. The following gives an overview of the dynamics of the intra-LoC trade (when it was operational) as well as what the major impediments related to it were:

Naseem (2017) proclaims that in 2008, both countries agreed to one of the biggest confidence-building measures (CBMs) i.e. initiating intra-LoC trade through two routes (Srinagar-Muzaffarabad and Poonch-Rawalakot). Mushtaq (2015) asserts that there are trade facilitation centers (TFCs) on both sides of the LoC crossing points where trade officers used to be present for regulation purposes (when trading was ongoing).Intra-LoC trade had been resilient (until it ended) and had, for the most part, continued despite border flare-ups; however, trade at times was disrupted due to the countless ceasefire violations on the Poonch-Rawalakot route (Ehsan, 2018). Most of the traded items were agricultural goods and the permissible items that traders could trade amounted to only 21. Items such as vegetables, spices, fruits shawls, rugs etcetera used to be traded.

The intra-LoC trade had been met positively from both sides as it helped the economy and development of the Kashmir region – not to mention it led to greater people-to-people contact across the border. Over 3 billion Pakistani rupees of trade was reached by 23rd June 2010. Furthermore, it is estimated that a total of $211 million has been traded between October 2008 until December 2011 across the LoC (Mushtaq, 2015). Intra-LoC trade steadily grew since its inception and sustained itself even during difficult times. Intra-LoC trade had zero tariffs applied to goods and followed a barter system (goods were traded for other goods – no money was exchanged). Despite the promising start of intra-LoC trade, there was a lot of room for improvement and if certain impediments were removed, it would have benefited the Kashmiris more substantially.

Traders cited several severe reservations regarding intra-LoC trade. Firstly, they stated that communication lines and links must be established between traders on both sides of the LoC. Before trading was suspended by India, no such communication links existed. According to Padder (2015), this meant that traders from one side could not call a trader form the other side. Citing security concerns, India barred the international direct dialing system from J&K to any part of Pakistan (including Azad Kashmir). It was also not possible for the traders to meet their counterparts on the other side of the LoC.

Secondly, similar to the inadequate services (from security systems to storage) on the Attari-Wagah border, the TFC’s on both sides of the LoC suffered the same fate. Since the security and checking of trucks and goods were conducted manually, it wasted the time of traders and weakened trade. Traders, therefore, suggested the use of X-ray cargo (truck) scanners (Mushtaq 2015). Moreover, better storage and cold storage should have been provided at TFCs since most of the goods traded were perishable ones such as fruits and vegetables.

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Thirdly, traders also desired an increase in the number of goods permissible for trade – more goods equal more trade volume. According to calculations, the annual potential trade volumes across the LoC was estimated to be around $974 million – trade volumes, before suspension, were not even close to this number (Mushtaq, 2015).

Fourthly, traders demanded the establishment of banking and financial channels as well as the elimination of the barter system for improved trade. Before trade was proscribed, no banking system had been provided and no decision had been made regarding which currency to use for trade (Padder, 2015).

Conclusion

Pakistan and India need to learn from other trading partners in the international arena and enhance their trading setup. Although tensions remain high (as they almost always have been), this does not validate poor trading relations. In fact, one would think that since poor political relations have been the norm between Pakistan and India, both countries would have managed to pen a more effective trading deal and/or improve their trading infrastructure. China and America have never been on the friendliest of terms, but they have maintained strong trading relations (for the most part).

As selfish as it is, countries akin to consumers seek to maximize their self-interest. It is in both Pakistan and India’s self-interest to improve trade between each other. It is equally important to restart the barred intra-LoC trade which benefited underprivileged Kashmiri people on both sides. Lastly, it might be a long shot due to the ultra-nationalist BJP government, but an improved trading scenario could lead to an economic dependency between both countries, which would give credence to improving political tensions. In other words, reducing or ending strong trading relations would hurt both countries and so political sanity might prevail – but this seems to be wishful thinking for now.

References

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About the Author(s)

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Sarmad Ishfaq works as a research fellow for the Lahore Centre for Peace Research. He has a masters in international studies from the University of Wollongong in Dubai where he graduated as the 'Top Graduate'. He has several publications in peer-reviewed journals and international magazines in the areas of counter-terrorism/terrorism and the geopolitics of South Asia and the GCC.

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