Salient Features of Pakistan's Trade with India
Saigol, Tariq Saeed, Economic Review
History of Trading Relations:
* Major Trading Partners at time of Partition
* Disruption following India devaluation
* War with India in 1965; complete breakdown
* 1974 - Restoration of Trade Relations on a Government to Government Basis
* 1976 - Commencement of Private Sector Trade
* 1979-86 - Reversion of Trade Relations to Public Sector only
* 1986-1987 - Some Trade liberalisation with Return of Private Sector
Trade Regimes Vis-a-Vis Each Other
GOP allows import from India of 577 items including some raw materials and industrial goods. Clear discrimination with respect to India, QRs only applicable to India. Otherwise, liberal import policy.
Following Trade Liberalisation moves by India in recent years. India apparently does not openly discriminate against Pakistan. However, general import policy not so liberal. Myriad of complex controls and quantitative restrictions, especially on agricultural products and consumer goods. Altogether, not so transparent import policy. Nominal Tariff Barriers somewhat less than Pakistan, with maximum tariff rate of 50% and in Pakistan, 65%. However, effective tariff protection higher due to QRs.
Lack of Discrimination by India has created pressures for granting MFN status to India by Pakistan. Same treatment as to other trading partners.
Volume of Trade
In 1994-95, Pakistan's exports to India were about $42 million and imports of $64 million. Total Trade of $100 million Pakistan exports 1/2% and India about 1/5%. Balance of Trade has shifted in favour of India since 1993-94. Little growth in volume of trade.
Major Pakistani exports to India are Fruit and fruit preparations (including juices), woven cotton fabrics, crude vegetables materials, cotton yarn and leather.
Major Indian exports to Pakistan are vegetable (including pulses), spices, oil seeds, coal, dyes tanning and other materials, machinery, construction materials (including comment).
Issues at the Highest Level
The basic question is whether TRADE NOW, PEACE LATER or PEACE NOW and TRADE LATER. Political considerations have traditionally restricted trade with India. There is a strongly held view that we should not develop economic and trade relations with India unless a just solution is found for the Kashmir dispute. Relaxation at this stage will be seen as a betrayal of the Kashmir freedom fighters. India will see trade liberalisation as a process of normalisation in the region which will tend to de-emphasise solution of the Kashmir problems.
Proponents of trade, however, argue that enlargement of trade will create a constituency for peace, bring the peoples of the two countries together and not only create pressure for political recounciliation but also bring the arms race in Pakistan and India to an end.
The other broad issue is the fear that even if political considerations are ignored of economic domination by India. India is the largest economy in South Asia, with an advanced industrial structure, cheaper labour, lower energy prices and interest rates will be a formidable adversary for Pakistan. With open trade and low transport costs Indian manufactured products which are more competitive will flood the local markets and wipe out the local industries such as pharmaceuticals, textiles, cement, engineering goods, dyes and chemicals, etc. India can, therefore, effectively engage in an economic war, through trade against Pakistan and destroy the economic base which supports our defiance expenditure.
As opposed to this, it is argued that historically Pakistan's export performance is better, India has traditionally followed a stronger import substitution regime as a result of which Indian industry is outdated and inefficient. The quality of products is generally low and are unlikely to satisfy the preferences of Pakistani consumers. Pakistan will be able to reap major economies of scale by accessing into the potentially huge Indian market.
At the more global level, there is the view that proximate countries are forming regional trade groupings like ASEAN, NAFTA, ECC, etc. If South Asia does not get together then there is the danger that we will be left behind and fail to capture the gains from rapid growth in international trade. This is the motivation behind SAPTA and the granting of tariff concessions.
What is the Evidence?
The first indicator is the nature and volume of illicit trade between India and Pakistan. If this volume is large and tilted in favour of India then liberalisation of official trade will greatly worsen Pakistan's position. Estimates of volume of smuggling differ widely from $100 to $1000 million. Wheat, edible oil and cloth goes to India while cattle, betel leaves, spices, tea, tyres, etc. are allegedly smuggled in India.
It is probably fair to say that smuggling from and to India is not very large and substantially smaller than smuggling from elsewhere into Pakistan. In particular, Indian consumer goods are not so visible in the shops of Pakistan despite the porous borders, low transport costs and apparent price advantages. Therefore, it is unlikely that Indian products will flood Pakistani markets if trade is liberalised.
The second indicator is the nature of the industrial structure and exports of India and Pakistan. One of the basic theorems of international trade is that trade between two countries will be maximised when their resource endowments greatly differ and not if they are similar. Both countries have a dominant textile industry, The Indian engineering goods industry is more developed.
The overall pattern of Indian and Pakistani exports is very similar according to a recent study. Categories of products which are exported by both countries account for 80% of Indian exports and 93% of Pakistani exports. India imports only two commodities (raw wool and raw cotton) which account for less than 2% of Pakistan's total exports. Pakistan imports eight product groups which are also exported by India like tea, sugar, machinery, transport equipment, iron and steel, pulses, iron ore. Therefore, the potential scope for trade appears to be limited although tilted somewhat in favour of India.
Opponents of trade with India argue that the similarity of the industrial structure and the pattern of exports is precisely what creates the danger that India can potentially confer larger economic losses by pricing out of local industry because of greater competitiveness and dumping practices leading to large scale labour displacement in Pakistan.
It has also been argued that given broad similarities trade could still be sizeable through carving out of market riches along the quality and product differentiation scale.
Results of research elsewhere demonstrate that when countries get together for trade either through liberalisation or formation of regional groupings then the big imports to trade over time is not so much through 'trade diversion' from other countries as from 'trade creation'. Therefore, the implications of opening of trade between India and Pakistan must not be seen in a static but in a dynamic context. Given the proximity of the two countries and similarity in socio-cultural preferences there is the possibility of conversion of non-traded to traded goods. In additional, to exploit economies of scale and scope, new investments will alter the comparative advantage of both countries in the medium term resulting in new trade flows. Who will benefit more from trade creation it is very difficult to say at this stage? It will hinge crucially on the dynamism and marketing capabilities of Pakistan versus Indian entrepreneurs and traders.
What should we Do?
The answer to this depends upon the consequences of the liberalisation of trade on producers, consumers and the government of Pakistan. Even if a sizeable volume of trade shifts from illegal to legal channels it is unlikely that gains to the government will be substantial in character in terms of additional customs duties revenues because, at least in the short term, trade may be restricted to largely import of agricultural commodities and possibly other high priority consumers goods like pharmaceuticals and some capital goods.
The primary concern will be the impact on Pakistani producers followed by the welfare consequences on domestic consumers. For the former, this will depend on the extent to which competition from Indian imports will displace local industry and labour and on the extent to which increased access, to the Indian market can be obtained and exploited.
These considerations along with the traditional political overtones relating to this issue indicate that Pakistan must follow a Selective and Phased policy of trade liberalisation with India, based on the following principles:-
a) Opening up Trade in non-competitive imports: Consumer goods, raw materials, intermediate and capital goods which are largely imported into Pakistan and in which local production is limited and likely to remain so in the foreseeable future may be opened up for trade with India through withdrawal of special quantitative restrictions. Normal tariffs as prevalent to other imports be applied. If the Indians can compete effectively under these conditions then imports from India will imply favourable price effects for Pakistan and improve our balance of trade even if India does not reciprocate by substantially improving access to its markets.
b) Opening up of trade in products with large consumer welfare gains: To the extent that Indians can compete effectively with local producers or other exporters in the market for basic consumer goods in Pakistan then this should be permitted. This principle could be extended to basic food items like sugar, pulses, vegetable, etc. and to industrial items like pharmaceuticals. Trade with India will then have favourable income distributive implications for Pakistan.
c) Seek access in which areas: India has traditionally maintained a very restrict trade regime for imports of consumer goods. Pakistan must seek access on a selective basis to these markets through relaxation of quantitative restrictions. Clearly, this will have to be in areas where Pakistani exporters are generally competitive and doing well in international markets. However, there is an important strategic consideration that opening of the Indian market should not remain restricted to raw materials and semi-finished goods which can then be effectively re-exported by India through value added in areas where India has a comparative advantage currently. Examples are export of uncut gemstones to India or leather and Pakistani cloth. The Indians have a strong advantage in the designing and finishing of fabrics and garments and could make it more difficult for Pakistan to compete for value added exports in international markets elsewhere in the world.
d) What are the necessary safeguards: India now has a stronger export bias and potentially gives a lot of fiscal incentives and support to its exporters. This includes well-defined subsidies, grants, concessional loans, tax concessions, equity investments and R&D funding. Currently, a range of targeted incentives are being provided to selected goods in agriculture, textiles and garments, engineering, electronics, computer software, gem and jewelry products groups. India has also identified export markets in which special efforts are to be undertaken to achieve some degree of market penetration. These efforts are likely to be further augmented if Indians are motivated by considerations of an invisible economic war with Pakistan.
There is need to protect Pakistani interests by developing effective instruments for monitoring protection through anti-dumping and countervailing laws. This law will also have to be effectively implemented. The procedures for hearings and taking decisions by the NTC and the Customs Department of CBR will have to be greatly streamlined.
Therefore, in conclusion, given the underlying political and economic considerations, Pakistan must follow a selective and Incremental policy of opening up our market to India. Simultaneously, Pakistan must negotiate along with other countries for greater transparency and removal of quota restrictions in the Indian import policy and withdrawal of subsidies to Indian exporters as per GATT/WTO provisions.…
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Publication information: Article title: Salient Features of Pakistan's Trade with India. Contributors: Saigol, Tariq Saeed - Author. Magazine title: Economic Review. Volume: 27. Issue: 11 Publication date: November 1996. Page number: 22+. © 1998 Economic and Industrial Publications. COPYRIGHT 1996 Gale Group.
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