Pakistan’s path to trade normalization with India

As Pakistan cautiously considers the prospect of normalizing trade with India, motivated by the recommendations of its business community, Foreign Minister Dar’s recent statements highlight the critical need for consensus building among stakeholders. These deliberations explain the government’s recognition of regional trade as a key tool for addressing the country’s ongoing economic challenges and particularly high and stubborn inflation. This strategic move fits with Pakistan’s broader endeavors to improve regional connectivity, through infrastructure investments from China and Saudi Arabia, alongside Iran’s expressed interest in finalizing a Free Trade Agreement (FTA) with Pakistan.

The backdrop against which these developments are taking place is important. Pakistan finds itself in a difficult economic position, striving to maintain its commitments to the IMF program amidst energy deficits and escalating import demands for its industries, all of which exert considerable pressure on foreign exchange reserves. In this context, promoting bilateral trade ties with India emerges as a strategic imperative. 

The World Bank Group’s research indicates that Pakistan’s exports could increase by 80 percent if trade ties with India are normalized. Pakistan’s exports of goods could be about USD 25 billion higher if trade with India was realized. Another World Bank study explained that India alone accounts for 85 percent of Pakistan’s unrealized trade potential.

The well-known historical uncertainties in trade commitments by both countries cast a shadow of doubt over the prospects of sustained progress. Despite being signatories to regional trade pacts like South Asian Free Trade Area (SAFTA), advancements in bilateral trade have been sluggish, marred by frequent fluctuations and setbacks.

Any decision to resume trade with India must be approached with cautious optimism and a clearly defined strategy aimed at mutual benefit.

 

Dr. Vaqar Ahmed

Yet, recent overtures suggest a glimmer of hope for a potential breakthrough. Dar’s emphasis on soliciting input from stakeholders, particularly the business community, exhibits a commitment to inclusive decision making. However, any decision to resume trade with India must be approached with cautious optimism and a clearly defined strategy aimed at mutual benefit.

It’s crucial for all stakeholders on both sides of the border to acknowledge that trade relations have often fallen victim to non-economic considerations. The suspension of trade between India and Pakistan was among other things motivated by India’s revoking of Article 370. The aftermath of the Pulwama incident further exacerbated tensions, leading to the imposition of stringent trade restrictions, driven more by political expediency than economic rationale. Additionally, airspace bans only served to compound the economic fallout.

Drawing insights from India’s trade engagements with Bangladesh and Sri Lanka proves instructive. These countries have actively cultivated stronger economic ties with India, yielding enhanced export performance and productive capacities. Bangladesh’s example informs the transformative dividends of trade liberalization, with exports to India experiencing a three-fold surge prior to the pandemic, consequently also enhancing government revenues.

A comparative analysis highlights Pakistan’s untapped potential for trade-led growth vis-à-vis its neighbors. The country’s restrictive trade regime, coupled with low utilization of existing FTAs and persistent non-tariff barriers, stands in contrast to the more liberal approaches embraced by its regional counterparts.

The non-tariff barriers in trade with India and South Asian countries even during periods of decent diplomatic relations, included high import taxes, stringent product testing, packaging regulations, and visa restrictions. Overcoming these hurdles requires the implementation of long-term and predictable industrial and trade policy measures, alongside streamlining of border procedures and harmonizing product standards.

In charting a way forward, Pakistan must also ensure three other policy or regulatory imperatives. Firstly, leveraging the significance of transit routes linking India and Pakistan can unlock substantial economic dividends, particularly for populations on the border, alongside promoting investment and revenue gains. Secondly, in tandem with reinvigorating the SAFTA process, pursuing bilateral trade accords similar to the Indo-Sri Lanka Free Trade Agreement (ILFTA) offers a pragmatic avenue for deepening trade relations while safeguarding domestic industries.

Thirdly, Pakistan must move away from shielding traditional sectors and toward nurturing export sophistication and value-added production. This entails elevating product standards, aligning with international norms, and facilitating exporters’ adaptation to non-tariff measures. Dispensing with protectionism and embracing competition from Indian and Chinese counterparts will bring efficiency gains, drive down prices, and benefit both producers and consumers.

Furthermore, Pakistan could harness the diplomatic leverage of its regional allies to reinvigorate economic ties with India. With Saudi Arabia, the UK, and the UAE signaling readiness to support trade rapprochement between the two neighbors, the moment is ripe for Pakistan to seize this opportunity. In the event of both countries exhibiting reluctance to take the first step, think tanks and other intermediaries could facilitate a track-1.5 or track-2 dialogue, wherein conditional measures for trade resumption could be deliberated by both sides.

– Dr. Vaqar Ahmed is an economist and former civil servant.