Out of favour

Post-World War II, the most favoured nation clause was drawn up in trade negotiations as a right of the smaller nations when trading with bigger countries.

Post-World War II, the most favoured nation clause was drawn up in trade negotiations as a right of the smaller nations when trading with bigger countries. Pakistan has turned the logic of that benefit upside down over the past decades to deny itself an MFN status with India, which is the queerest part of the on-off debate across our border.

In effect, it has meant the offer of MFN made by India in 1996 has remained a dead letter. Since then, the refusal to offer wider access and low tariff to India by Pakistan has shaved off more than 1% from the Pakistan’s annual GDP ($174.8 billion). That is a high cost to pay.

Meanwhile, the India-Pakistan trade story, halfway through since 1996, has been long drawn out like a boring Bollywood movie, traveling through unnecessary twists and turns. The happily ever after, too, seems far away, even now. The next scene is set for India-Pakistan trade normalisation talks, beginning today in New Delhi.

Before then, the Pakistani commerce ministry is looking hard for a ‘national interest’ clause to make the trade deal with India swing (apparently dictated by Prime Minister Yousuf Raza Gilani).

The MFN status will mean India would enjoy the same trade advantages (lower tariffs for instance) that Pakistan grants its other trading partners. Pakistan will permit imports of many more Indian products than it does now, except for a small ‘negative’ list, thus moving away from the current system where there is a positive list of only 1,934 items.

Huge potential

Figures and estimates bring the picture into sharper focus. Trade between both countries in fiscal 2010-11 was $2.66 billion, which both nations have vowed to increase to $6 billion in the next three years. However, research by Indian Council for Research on International Economic Relations (ICRIER) points out that trade potential between the two nations could have been as high as $14 billion in 2009, of which Indian exports to Pakistan are pegged at over $11 billion.A recent study by a public sector bank in Pakistan has also highlighted that currently only 2% of the trade potential has been achieved and if Pakistan opens up, bilateral trade between the two countries would increase by a multiple of ten quickly.

As of now, even as India allows imports of more products from Pakistan than Pakistan from India, the trade surplus is in India’s favour and it has, in fact, increased by 95% since 2006.

Federation of Indian Exporters’ Organisation (FIEO) president Ramu Deora explains why better trade relations is a win-win proposition for both countries. ?India would be able to diversify its export basket to Pakistan and supply products directly that are currently being routed through other countries. On the other hand, Pakistan would be benefited as it shall be able to source the same products at a reduced price by negating the burden of trans-shipment,? he says.

Sectors that are likely to gain the most once trade normalises are agricultural products, tyres, auto, chemicals, pharmaceutical, engineering goods, textiles, power and petroleum products.

Deora adds, ?Exports of man-made filaments, organic chemicals, other miscellaneous chemicals, tea, coffee, vegetables, plastic articles and rubber products can increase substantially. Besides, there is also a need for relaxation of visa norms for businessmen. Traders must be allowed to invest in the other country and non-tariff barriers should be relaxed to take the economic engagement to a new level.”

The Engineering Export Promotion Council also adds that if trade normalises soon, India can expect a 30% growth in engineering exports alone to Pakistan in the next five years.

Illegal trade

Experts are also of the opinion that once trade normalises formally, the illegal trade that happens through various passages will also decline. A senior government official says on the condition of anonymity: ?Rough estimates say around $700 million worth of illegal trade takes place currently between the two countries. We estimate that a bulk of this trade is via a third country like Dubai, China, Thailand, etc.”

Deora points out here, “Almost 75% of India’s pharma exports to Pakistan go via Germany, Bahrain and Dubai. Legal trade will benefit Pakistan more as the third-country margin will be done away with and Indian goods will become cheaper.” Experts say almost half of India’s exports to Pakistan are accounted for by trade from Mumbai via Dubai.

Poor infrastructure

On the ground level, poor banking and land route facilities are also impacting trade. A small exporter who sends his exports via land route to Pakistan tells FE, “Till the time governments do not improve banking facilities, trade will be hampered. I regularly face a delay in payments as it takes more than three months for a payment to get realised in India.”Another exporter who did not wish to be named says the poor facilities at Wagah-Attari cause huge bottlenecks. ?Due to extensive red-tapism, the border checkposts do not clear trucks till all perishable items have been moved and this adds to the delay and escalates costs. The demand also dries up because of the delay. People are ready to pay more rather than wait for consignments to reach after a long delay. Even at ports, there are no scanners and the loading, unloading is still not mechanised,? he adds.

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First published on: 13-11-2011 at 01:53 IST