On his return from the meeting of the Group of Twenty Nations (G-20) in Cannes, Prime Minister Manmohan Singh will travel to Maldives to attend the South Asian Association for Regional Cooperation (SAARC) summit. He will meet his Pakistani counterpart Yousaf Raza Gilani and among other things discuss Pakistan’s recent decision to grant Most Favoured Nation status (MFN) to India. Welcoming the move when he heard about it in Cannes, Manmohan Singh quipped uncharacteristically, “der aaye, durust aaye" (better late than never).

Photo: Blooomberg

The principles upon which the WTO is based seem strangely anachronistic in a crisis-ridden world where countries have been subjected to protests and where each country is attempting a cleverly disguised way to keep jobs and industries at home. WTO has 153 member countries today and 30 observers (those seeking to join). After nearly 10 years of rigorous preparation, China joined WTO in 2001. India has been a member from the very beginning of WTO. The most notable observer (non-member) is the Russian Federation. WTO is based on the principles of “open, non-discriminatory, predictable, transparent, and competitive trade". It allows some flexibility for developing countries to adjust their systems and has of late included environmental protection in its mandate.

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The timing of Pakistan’s MFN decision is surprising and overdue coming as it does 15 years after India granted this status to Pakistan. Commonly misunderstood, MFN simply refers to the principle of non-discrimination among WTO members—treating all trading partners equally. Pakistan has so far maintained a 2000 item “positive list" of importable items. This list will now be freed and will likely be replaced by a (hopefully) shorter “negative list" of imports. Bilateral trade between India and Pakistan is estimated to be about $2.7 billion even though the informal trade between the countries is estimated to be about four times that figure. Some of that informal trade is conducted through “circular trade" via free ports such as Dubai and Singapore.

The MFN development is welcome. Trade between the two countries is unnaturally small, and the potential for gains quite large. A gravity model of trade between the two countries, which states that trade is directly proportional to the two countries’ gross domestic product and inversely proportional to the distance between them, suggests significant potential. By some estimates, Pakistan could save several hundred million dollars a year immediately by importing from India some of the items that it now imports from the rest of the world. For India, markets for several products, so far not allowed, become accessible. What peace summit after summit has not achieved may well become a realizable target with greater trade between the countries.

The MFN decision is the first of a chain of decisions that can grease the wheel of trade between the two countries. As a gesture to keep the momentum going, India should consider a positive response by reducing some non-tariff barriers. In particular, India could do one or more of the following: ease tough restrictions on trade in the information technology (IT) and services sectors, simplify some visa procedures including multiple entry permits and physical police station visits, increase the number of ports at which “sensitive" products are cleared and create a framework for Pakistani branch banks to operate in India and allow direct trade payments without having to route it through third countries. Pakistan, in turn, can reciprocate by keeping the “negative list" short and engaging India on the mutual arrangements for banking and transportation. In the medium term too, much can be done. The two countries can set up arrangements for energy trade (Iran-Pakistan-India pipeline), allow transit goods to third countries, and eliminate reciprocal requirements for rail wagons to return empty, and improve and harmonize road and rail infrastructure in the two countries.

There will be many objections, here and there. Mutual distrust is high. But an eye for an eye is a terrible strategic policy for both countries. Better to substitute that with an apple for an onion.

P.S: As former prime minister Atal Bihari Vajpayee wisely observed, “ you can change your friends, but not your neighbours".

Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at narayan@livemint.com