The horrific bombing of the Samjhauta Express on Monday is bound to cast a shadow over the upcoming meeting of ministers from India, Pakistan and the other countries of South Asia. This meeting is to be held at Kathmandu on 26 February to discuss the South Asian Free Trade Area (Safta) agreement, which aims to increase trade and investment in the region.
Despite the terror attacks on Indian soil, the government would do well to keep the Safta idea alive. More trade between India and Pakistan can be an important part of the broader peace process between the two countries.
Pakistan has taken a tough stance on its trade with India. It has done precious little to open its borders to Indian goods and services, despite some positive (and empty) statements from its government. It has not even stayed true to the global rules of the trade game.
Every member of the World Trade Organization (WTO) has agreed to automatically give other members a most favoured nation status (MFN)—essentially a commitment that trade with that country would not be discriminated against. The MFN commitment can be put aside only in special cases, such as free trade areas or where national security is threatened.
Pakistan uses the second reason to deny India its MFN status. More than 700 types of goods from India cannot get into Pakistan because of a “negative list” of proscribed products. This protectionism—ostensibly for security fears—is odd considering that it is India that has more worries about cross-border terrorism than Pakistan does.
Pakistan, on its part, says that the MFN status that India gives it is meaningless, since its exporters face a series of non-tariff barriers. Containers carrying goods from Pakistan, for example, are held up at Indian customs for all sorts of flimsy reasons. It is very difficult for Pakistani exporters to get letters of credit from Indian banks to finance their trade.
There is one beneficiary of these trade disputes—Dubai. While the official trade between India and Pakistan is a mere billion dollars a year, more than 10 times that amount is traded through Dubai, boosting the income of this port city. The trade diversion is huge.
Smoother trade channels between India and Pakistan will bring an end to the Dubai trade ploy. But there are more long-term benefits as well. The World Bank says in a recent study that South Asia is the least integrated region in the world. Trade between the nations in this region—especially between India and Pakistan—is less than 2% of regional GDP. The countries of East Asia trade 20% of their GDP between themselves. Or consider another indicator—telephone calls. Only 7% of international calls made from South Asia are regional, compared with 71% in East Asia. Both India and Pakistan (as well as the other countries in South Asia) will benefit from higher trade. The economic case for higher trade between nations is clear enough. At a more micro level, the districts along the international border will have larger local markets to service. The World Bank estimates that trade within South Asia can be doubled if intra-regional trade is smoother. That means that we could be looking at an Indo-Pakistan trade figure of $20 billion.
There are significant other economic opportunities as well, from cross-border investment to building common infrastructure to cooperation on multinational projects such as the Iran-Pakistan-India gas pipeline.
The Safta negotiations in Kathmandu and beyond are bound to be difficult. Pakistan runs a huge trade deficit with India and is worried about the rising economic power of its neighbour. But Pakistani business leaders also realize that closer links with one of the world’s most dynamic economies has significant benefits.
It is not our case that political considerations should be swept under the carpet, especially the issue of cross-border terrorism. But successive governments have shown that while terrorism and Kashmir will continue to be sore points, parallel negotiations on peace and trade can be maintained.
For corroboration, look no further than China and Taiwan, which are still officially at war but are comfortable with trade and investment bonds. India and Pakistan can trade without giving an inch on the more messy issues that keep them at loggerheads.
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