A lot of hope is riding on the belated move by Pakistan to give India the most favoured nation status, some 15 years after India had done the same for its neighbour. To be sure, Pakistan continues to send confusing signals: its government said on Thursday that it had merely cleared a process of “normalization of trade relations … which would culminate in the observance of the MFN principle”.
Yet, a lot of hope is riding on the further promotion of trade ties between the two countries. Trade helps turn foes into friends. US-Vietnam relations improved significantly after they inked a bilateral trade agreement which resulted in increase in trade from less than $1 billion in 1990 to $16 billion in 2010. Germany and France fought in two world wars, but are now allies in the European Union.
The economies of India and Pakistan were joined at the hip at the time of Partition. In 1948-49, according to a recent study by the South Asian Association for Regional Cooperation, India accounted for 56% of Pakistan’s exports and imports from India contributed to 32% of total imports. Trade soured after the Indo-Pak wars in 1965 and 1971, which brought bilateral trade to almost negligible levels. This remained so till 1996, when India accorded MFN status to Pakistan. Bilateral trade in 20010-11 was at $2.6 billion through legal channels, which some more channeled through third countries such as Dubai.
BSF jawans and Pakistan Rangers prepare to lower their flags during the nightly border closing ceremony at Wagah border check post ( Reuters)
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Though countries located close to each other tend to trade more than with distant countries owing to lower communication and transport costs, Indo-Pak trade is minimal. How large should trade between India and Pakistan be? We have done a simple calculation here, by taking trade between India and other neighbouring countries, and then estimating how much that trade would have been if the economies of these neighbours were as large as the Pakistan economy. For example, trade between India and Sri Lanka was $4 billion in 2010-11; by that measure, trade with Pakistan should have been $50 billion. With similar scaling for size in the case of Bangladesh and Nepal, we get trade estimates of $7 billion and $30 billion respectively.
The range of estimates here is very wide, but what it does tell us is that trade between India and Pakistan could be higher by anywhere between a factor of three and 20.
To be sure, there are other issues to be dealt with, including non-tariff barriers (a constant complain from the Pakistan side), common infrastructure to ease the flow of goods across the border, and, most importantly, security concerns (something the Indian government has reason to be worried about given the history of cross-border terrorism). Despite the little games Pakistan is playing over MFN status to India, more trade between the two countries could help the cause of peace.