What’s holding up India-Pakistan trade normalization?

On March 19, Pakistan’s government gave a briefing to the country’s top military officials.

The topic of this high-level meeting was not the Taliban’s takeover of the Tirah Valley, fresh tensions with Afghanistan, or other urgent national security matters. Rather, the briefing-delivered by the commerce secretary to the army, air force, and navy chiefs-was about tightening trade ties with India.

This issue has been a priority for Pakistan’s civilian and military leadership alike since November 2011, when Pakistan announced its intention to extend Most-Favored Nation status to India (New Delhi granted this privilege to Islamabad in 1996). The decision was rooted in the realization that the potential benefits of a formal trade relationship with India-lower prices and variety for consumers; bigger export markets for producers; more employment for the masses; and greater revenues (currently lost to smuggling and other informal trade) for the government-were too immense to pass up.

Since then, both countries have continued to give strong indications that they intend to make their trade relationship a close and formal one. Last year, Pakistan abolished its positive list of goods that could be imported from India, and replaced it with a shorter negative list of items that couldn’t be imported. The two capitals also launched a new integrated checkpoint at the Attari-Wagah border crossing (which serves the only land route for Pakistan-India trade), and concluded a landmark visa agreement that loosens travel restrictions.

This year, even after political relations took a plunge following a series of deadly exchanges along the Line of Control in January, the desire for trade cooperation remains strong. In recent weeks, each nation’s ambassador to Washington has publicly affirmed-one at Harvard, the other at CSIS-the imperative of a strong trade relationship. Just days ago, Islamabad’s envoy to New Delhi assured an audience of Indian and Pakistani businessmen that "we want trade normalization and there is a roadmap for that."

However, despite these encouraging signs, trade normalization remains a work in progress. Pakistan had pledged to phase out its negative list by the end of last year-thereby bringing the two countries closer to a fully operational MFN regime-yet today it remains in place.

So why the holdup?

One commonly cited explanation is the resistance of Pakistan’s powerful agricultural interests, who fear the consequences of heavily subsidized, cheap food products coursing into Pakistan-particularly those, such as bananas and oranges, which Pakistani farmers already produce in abundance. Predictably, last November, the president of the Basmati Growers Association warned that his members faced "economic suicide." And the head of Farmers Associates Pakistan (a lobby group) threatened to literally block Indian agricultural products from entering Pakistan.

However, a new Wilson Center report on Pakistan-India trade, edited by Robert M. Hathaway and myself, presents a more complex picture. Some food producers actually relish the prospect of acquiring foodstuffs from India, because they believe such products will be of higher-quality then their own, and hence generate greater profits. Another surprising source of support is the textile industry, which believes it can capture major shares of the Indian market. Pakistani home textile and bed ware manufacturers have already explored joint venture options with Indian partners.

There is, however, strident opposition from other sectors. The pharmaceutical industry fears that India’s surfeit of raw materials and large economies of scale will marginalize Pakistani products, while the chemical/synthetic fibers sector worries that India will dump its large fiber surplus in Pakistani markets. Our report also highlights opposition within the automobile industry. Manufacturers are anxious that Indian car parts will flood Pakistani markets and devastate local industry, and fear that Pakistani parts exports will suffer because Indian car makers prefer domestically manufactured parts. Islamabad has given in to the car industry’s protectionist proclivities; the sector has nearly 400 items on the 1,209-item negative list-far more than any other sector.

Another likely reason for the MFN delay is politics. Security and territorial disputes have a historic habit of contaminating Pakistan-India trade relations at the most inopportune of times. In 1965, the two countries went to war over Kashmir, bringing an abrupt end to a promising period of commercial ties (in the preceding 18 years, the two nations had concluded 14 trade facilitation agreements). Banks in both countries were seized as enemy properties, and customs officials at the Wagah border crossing were the war’s first civilian prisoners of war.

Nearly 50 years later, a more subtle dynamic is at play. Last June, an Indian government official lamented that momentum for trade normalization had slowed because Islamabad was linking trade to progress on the territorial issues of Siachen and Sir Creek. It’s a lament that highlights a major obstacle to Pakistan-India trade normalization-because it exposes a major disconnect in each country’s motivations for pursuing normalization.  

Back in April 2012, Foreign Minister Hina Rabbani Khar proclaimed that trade normalization would "put in place the conditions that will enable Pakistan to better pursue its principled positions" on territorial issues. Some observers, however, believe that New Delhi sees stronger commercial relations as an end in themselves. India-at least up to now-has demonstrated no interest in making the territorial concessions that Pakistan hopes closer trade ties will bring about. Islamabad likely understands this disconnect, and is hesitant to consummate MFN because it fears that the Pakistani public would, in time, perceive the move as a sacrificing of political and territorial issues for purely material gain.

Our report, drawing on the views of its eight contributors, offers 15 recommendations aimed at addressing these challenges to normalization. Several suggest how to get Pakistanis to embrace trade as a good thing in of itself. For example, Pakistan’s media-a powerful influence on public opinion-should amplify the advantages of bilateral trade by spotlighting the positive sentiments of consumers and producers. Other recommendations focus on how to keep political/territorial issues from sabotaging trade ties. Both sides should remain committed to the Composi
te Dialogue-a formal process of ongoing bilateral talks that began in 2004 and encompass a wide range of topics, including territorial issues. Additionally, trade should be divorced from developments within the security realm. This means that New Delhi should not impose punitive trade measures or close its borders if Pakistan-based terrorists attack India.

The report also underscores the imperative of acting quickly to cement trade normalization-because global economic developments make doing so a virtual necessity. Rich-country trading partners of India and Pakistan are facing economic slowdowns, and Europe’s financial crisis is contributing to diminished exports. Now is therefore the ideal time for India and Pakistan to more robustly tap into each other’s markets. To that end, our recommendations call for the implementation of trade-facilitation measures that accelerate the path to normalization.

These include loosening transit restrictions (India and Pakistan restrict each other’s ability to use the other’s territory to reach third countries); enhancing trade route efficiency (this can be done by improving the quality of roads and railways, and by removing restrictions on the type and size of trucks and train cars); and establishing new private oversight institutions-including a dispute resolution mechanism-to guide the bilateral economic relationship. The emphasis here should be tackling non-tariff barriers (from long waiting times at border crossings to rejections of bank-issued letters of credit) that make many exporters-especially Pakistani-reluctant to pursue cross-border trade.

In recent days, Islamabad has refused to provide a timeframe for completing trade normalization, other than some vague assurances that the negative list will be phased out after this spring’s elections. According to Pakistani insiders, such statements are genuine. All political parties in Pakistan fully endorse trade normalization, argue these observers, and whatever the composition of the next government, it will be determined to move forward.

For the sake of regional peace, let’s hope so. A new National Intelligence Council study contends that trade may be the only way to keep South Asia peaceful over the next 20 years-because it’s the most realistic strategy to dramatically boost employment in Pakistan, and thereby to reduce the prospects for youth radicalization and a new generation of militants who terrorize both Pakistan and India.

So while trade normalization has great potential payoffs for India and Pakistan, it also matters immensely for the rest of us. In the words of one of our report’s contributors, "the entire world has a stake in peace in South Asia."

Michael Kugelman is the senior program associate for South Asia at the Woodrow Wilson International Center for Scholars in Washington, DC. He can be reached at michael.kugelman@wilsoncenter.org and on Twitter @michaelkugelman