ISLAMABAD:
The
recent granting of Most Favoured Nation (MFN) status to India by Pakistan,
along with other trade agreements signed, have raised a number of questions
concerning the effect these would have on Pakistan’s economy. Trade as per the
MFN agreement was expected to start in January 2013, whereby Pakistan would
trade with India on the basis of a negative list approach. This would mean
trade possibilities would be expanded to all items that are not on the limited
negative list – the list of untradeable items.
Although
Pakistan has earned a bad name due to the delay in reciprocating the granting
of MFN status to Pakistan by India in 1996, the fact of the matter remains that
the former still imports more from the latter than vice versa. This, perhaps,
points to the issue of non-tariff barriers (NTBs) that India uses to control
the amount of its foreign imports.
Simply
put, any trade barrier that is not a tariff is a non-tariff barrier. This
implies the existence of a diverse range of barriers that fall under this
definition. While these NTBs are applied by India to imports from all countries
and not just Pakistan, they are more stringent in the sectors of export
interest to Pakistan, such as the textile sector.
Commenting
on India’s use of NTBs, the WTO recently observed that “India was one of the
highest users of anti-dumping and frequent user of safeguard measures against
imports from other countries”. Even historically, India’s import license regime
has shown a blatant distaste for imports of finished products. These licenses
have usually been granted for the import of raw materials for Indian export
sectors.
If
trade is to increase between the two South Asian economies and greater economic
integration is to take place, India will have to substantially reduce these
non-tariff barriers. An agreement signed between India and Pakistan last year
addresses the NTB issue, although only the future will tell whether India
actually does act upon the signed agreement.
As
for the gains from bilateral trade, a plethora of economics literature
discusses how it leads to more competition, efficiency and consumer gains.
Currently, official trade between India and Pakistan stands at a dismal $2
billion, while informal trade via UAE, Hong Kong and Singapore accounts for
another $2-3 billion. An MFN agreement may be a necessary condition to bring
this informal trade into the formal channel, but not sufficient. This is again
due to the NTBs that exist between the two countries.
Recent
studies estimate that, by the next couple of decades, India’s large population
will become a net importer of agricultural food products. This presents a
golden opportunity to Pakistan, since India would obviously look to its
neighbour as the cheapest import market. However, farming policies would have
to change in Pakistan to increase output, the room for which is plentiful.
To
identify Pakistan’s agricultural inefficiency compared to India, the example of
cotton should suffice. While India’s cotton output increased from 9,135,000 to
25,500,000 cotton bales from 1990 to 2012, Pakistan’s output only increased from
7,522,000 to 10,000,000 in the same period, according to the United States
Department of Agriculture. Policymakers need to look into this and devise a
plan to increase agricultural output, if Pakistan is to cash in on this export
opportunity.
Another
sector that could benefit from more trade with India is the leather industry –
one of the largest export sectors of Pakistan. While Pakistan does export
leather to India for its footwear market, the chemicals used for the processing
of these hides are currently being imported from Germany, since they are not on
the list of goods allowed to be imported from India. If trade opens up, the
leather sector of Pakistan could earn a huge cost advantage by importing these
chemicals from its neighbour.
The
outlook
In
November 2012, the Sustainable Development Policy Institute (SDPI) held a
consultative meeting with major businessmen in Karachi. It was a welcome sign
that almost all major businessmen that belonged to the leather, textile, food,
automobile spare parts, banking, IT and oil sectors of the country were in
favour of more trade with India. India’s huge middle class would not only act
as an important export market for Pakistan, but cheaper raw materials and
machinery could also be imported from India once trade opens up.
Dr
Ishrat Hussain, also a part of the meeting, mentioned how it would be foolish
to protect a few inefficient Pakistani businesses at the cost of huge consumer
gains to the people of Pakistan. Cheaper products would lead to more savings,
and increased competition would lead to more efficiency. After all, all
approaches to economic development focus on the consumer – and there is no
doubt about the fact that the Pakistani consumer stands to gain a lot from
trade with India.
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