What’s in it for us? The potential in India-Pakistan trade

The series of trade facilitating measures enacted by India and Pakistan starting in November 2011 were undoubtedly the first steps toward creating new trading opportunities that could lead to a quantum leap in bilateral trade between the two countries. Trade potential between India and Pakistan is estimated to be $19.8 billion (U.S.), which is 10 times larger than the current $1.97 billion in trade. Of this, India’s export potential accounts for $16 billion and its import potential accounts for $3.8 billion. The potential in India’s mineral fuels is another $10.7 billion, of which export potential accounts for $9.4 billion and import potential $1.3 billion.

The items with the largest export potential include cellular phones, cotton, vehicle components, polypropylene, xylene, tea, textured yarn, synthetic fiber, and polyethylene. The items with largest import potential include jewelry, medical instruments and appliances, cotton, tubes and pipes of iron and steel, polyethylene terephthalate, copper waste and scrap, structures and parts of structures, terephthalic acid and its salts, medicines, and sports equipment.

In a major move towards normalizing trade relations, Pakistan’s transition from a positive list to a negative list in March 2012 (except for road-based trade, for which Pakistan continues to maintain a positive list of only 137 items) was perhaps the most significant step toward unleashing bilateral trade potential.  Under the positive list approach, Pakistan imported from India a specified list of items. The negative list specifies the banned list rather than the permitted list of imports, allowing a much greater flow of goods from India.

India and Pakistan also maintain sensitive lists as members of the South Asian Free Trade Area (SAFTA) agreement. While negative lists specify items that are completely banned from trade, sensitive lists consist of items on which trade is permitted but tariff concessions are not allowed. As in any trade liberalization process, there will be both winners and losers. The negative and sensitive lists indicate sectors in which countries want to protect domestic industry from each other’s imports.

A substantial proportion of India’s export potential to Pakistan – 58 percent – is in products that are on Pakistan’s negative or sensitive lists, applicable to India under the South Asian Free Trade Agreement (SAFTA). Similarly, 32 percent of India’s import potential from Pakistan is in items on the sensitive list for Pakistan applicable under SAFTA.  Further, Pakistan’s negative list indicates that the automobile and component industry is the largest sector that enjoys protection from Indian imports.

On the other hand, agricultural items, for which resistance to liberalization is building up in Pakistan, are unlikely to have any impact as this sector has already been liberalized. Pakistan’s sensitive list indicates that textiles account for 24 percent of the items on the list, but this sector accounts for only 3 percent of India’s export potential of items on Pakistan’s list. India’s sensitive list indicates that the textiles sector is protected the most-a sector in which Pakistan enjoys a comparative advantage. Most of the items on the sensitive list are fabrics, which if allowed at preferential (lower) tariffs into India will compete with large firms (rather than small firms) in India that produce comparable quality. Even though these firms are likely to oppose liberalization, there is no rationale to protect large firms.

India’s sensitive list under SAFTA applicable to Pakistan indicates that the textiles sector is protected the most (accounting for 22 percent of India’s import potential) – a sector in which Pakistan enjoys a comparative advantage. It can be inferred that while Pakistan considers its automobile sector as the most vulnerable, India fears competition in the textile sector.

To realize the untapped trade potential between the two countries, several physical and regulatory impediments need to be addressed. Expansion of physical infrastructure at the land borders, amendment of transport protocols to allow seamless transportation without the requirement of transshipment of cargo (the transfer of goods from one country’s truck to the other country’s truck at the land borders because Indian and Pakistani trucks cannot operate in each other’s territory),and dismantling of the road-based positive list are measures that could bring about a substantial reduction in the transaction costs of trading between the two countries.

Non-tariff barriers have been a key issue for Pakistani business people trying to access the Indian market. While there are genuine non-tariff barriers related to the complexity of regulatory procedures, non-transparent regulations, port restrictions, and problems related to recognition of standards and valuation of goods, these are not discriminatory and are being addressed in India’s ongoing reform process. It is more difficult to address "perceived" barriers that business people face in entering each other’s markets. Business people fear entering these markets as they are not sure their goods will be welcomed. This is more so in the consumer goods market segment. However, there is evidence that some businesses have made a bold entry with their country labels and have not met much resistance. Exhibitions and fairs are an effective way of dealing with these perceived barriers.

For deeper and stronger trade linkages it is important that there are foreign investment flows between the two countries. Businessmen from both countries are reluctant to invest as they fear the consequences of a possible political event. If a bilateral investment treaty is put in place it could improve business confidence. In the meantime, businessmen in both countries have suggested allowing joint ownership of manufacturing facilities located in the respective countries. Thus, investors can enter into joint ventures without physically locating in each other’s territory. This could be the first step for entry until legal systems can be altered to safeguard investments, and there is an improvement in investors’ confidence.

A key determinant of realization of trade potential is the liberalization of visas. The revised visa regime expected to become operational soon provides only an incremental improvement over the existing system as it introduces measures to ease travel of tourists, pilgrims, elderly and children. The business visa is also more liberal for certain categories.  As security is a key concern, information technology-driven systems should be made to screen visa applications and physical movement of people.

India and Pakistan need to engage with each other to understand each other’s regulatory regimes. As new businessmen enter the economy it is important to have forums that would bring buyers and sellers together. The business communities must create multilevel channels of communication that can reduce misconceptions, bridge the information gap, and generate a significant change in the business environment of the two countries. This could help in realizing the untapped trade potential between the two countries.

Nisha Taneja is a professor at the Indian Council for Research on International Economic Relations in New Delhi.