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BW Businessworld

Trade Diplomacy

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History is replete with examples of how robust economic relations between countries help in addressing and resolving political conflicts. The present-day Europe is an example. Countries which fought against each other not so long ago have jointly formed the European Union primarily for trade and commerce. There is a special economic cooperation agreement among Israel, Egypt and Jordan, and, according to some analysts, this provides a significant counter-balance to political conflicts in West Asia.

India and Pakistan should learn lessons from these countries. Fortunately, after a gap of almost a decade both have agreed to take trade-related confidence-building measures, which can have far-reaching implications for normalisation of ties between the two neighbours. A number of forward-looking steps have been taken during the recent visit of Indian commerce minister Anand Sharma to Pakistan. These should form the basis for a built-in agenda for strengthening relations between the two countries.

As always, sceptics will cry foul. For instance, there is a negative sentiment in some sections in India over the delay on the part of Pakistan to grant the most favoured nation (MFN) status to India, which may not mean much in terms of new trade creation or diversion but is a politically-sensitive issue.

A more important issue in forging Indo-Pak trade relations is moving (on the part of Pakistan) from the positive list to the negative list regime which will allow both countries to trade all products barring only those listed in the negative list. However, the recent decision of the Pakistani cabinet to defer the modality of doing trade with India from the positive list approach to a negative list regime should not be looked at with pessimism. Why? That decision might change over time, given the overall agenda of normalising trade relations between the two countries.

Five important decisions were taken during Anand Sharma's visit which will address concerns about customary and procedural non-tariff measures affecting trade between India and Pakistan. Formal trade between the two countries is worth about $3 billion per year, while its potential is huge. Some estimates say that trade can be enhanced to $10 billion per year (including formalisation of informal trade via third countries) if some significant non-tariff measures are addressed.

The importance of easing visa rules, simplification of customs' procedures, mutual recognition of each other's standards, institution of a body to deal with trade-related grievances, and opening of bank branches in each other's country is to be viewed as part of a built-in agenda for incremental improvement in trade relations.

Normalisation of Indo-Pak trade relations will also give a significant boost to regional trade integration in South Asia, since the two are the largest member states of the South Asian Free Trade Area (SAFTA). During the 17th SAARC Summit in Maldives in November 2011, the participating heads of state had renewed their commitments to cut down their respective sensitive lists containing products which are kept out of bounds from the tariff reduction programme under the SAFTA agreement.

Recently, CUTS International, a non-profit working for justice and equality, with support from The Asia Foundation and a group of NGOs, conducted a study on "Cost of Economic Non-Cooperation to Consumers in South Asia". It estimated that consumers will benefit from access to cheaper products if SAFTA facilitates more open trade between the regional economies. Minimum gain in terms of annual savings on account of overpriced imports from outside the region would amount to around $2 billion.

The study found that the trade between India and Pakistan has enormous growth prospect. Both countries together stand to save a minimum of 55 per cent of their total imports on about 200 product categories, reducing the consumption expenditure of both the countries by more than $800 million per year. While a large share of gains to Indian consumers will be through Pakistani exports in plastic-based articles, minerals and mineral fuels, Indian exports in pharmaceutical ingredients and electrical equipment will reduce Pakistan's import burden.

The built-in agenda agreed by India and Pakistan would not only normalise trade relations, but can also help reduce trust deficit between the two neighbours.
 
With inputs from Joseph George, a research associate at CUTS International. Bipul Chatterjee is deputy executive director at CUTS International. The views are personal.

(This story was published in Businessworld Issue Dated 05-03-2012)