August 27, 2012
India-Pakistan Relations: From Trade to Peace
by Dr Marie-Aimée Tourres
ECONOMIC INTERDEPENDENCE: Recent developments give grounds for hope for India and Pakistan
LESS than two weeks ago, India and Pakistan were celebrating their independence from their common British rulers in 1947. It is also when the two respective territories started to exist independently.
Since the partition, relations between India and Pakistan have been fraught with three wars, tensions, shattered relations following the 2008 Mumbai attack and conflict (with the Kashmir, Sir Creek and Kargil issues standing out).
This resulted in a reduction of cross-border relations of people and goods. Historic trade routes connecting East Asia with Central Asia or bilateral routes such as Mumbai-Karachi and Lahore-Amritsar were closed. Numerous academic papers demonstrate that commercial interdependence leads states towards peace, and that economic interdependence is connected with a reduction of international tensions. Will India and Pakistan follow the textbook theory?
We would like to see, in the latest bilateral trade developments over the past few weeks, a positive step towards it.
On August 1, India formally confirmed what its Trade Minister announced earlier this year. India is overturning its ban on foreign direct investments from Pakistan in all sectors, with the exception of those linked to national security.
Additionally, trade must be supported by a proper finance network and mechanisms. As such, the central banks of India and Pakistan were fast to react and agreed on Aug 22 to allow two banks from each country to open branches in the other under a full banking licence.
The chosen banks are National Bank and United Bank Ltd of Pakistan, and State Bank of India and Bank of India. If this materialises, it is a keystone step. But maybe the other most notable aspect of this confidence-building set of measures is the Most Favoured Nation (MFN) status, which Pakistan finally conceded to India, after its Foreign Minister Hina Rabbani had made a decision to grant this status in October last year.
China and India granted each other MFN status in August 1984. India gave MNF status to Pakistan 16 years ago, and has been forcefully demanding due reciprocity.
MFN is one of the instruments in use by the World Trade Organisation to prevent discriminatory treatment among member countries. It ensures that an importing country giving any type of concession to a third party country, will give it to all its other trading partners. Pakistan is thus bound to grant MFN status to all member countries, including India.
Officially, India-Pakistan bilateral trade amounts to US$2.7 billion (RM8.4 billion) but this is without counting black market trading and indirect routes like Dubai and Singapore for an estimated amount of US$3 billion. But if trade ties can be seen as a new arm in a peace process, this can only happen if it is a win-win situation. Is this the case?
India can now export 6,800 items to Pakistan. But India has now dropped its strong opposition to Pakistan asking WTO for special access concession to the EU market for its textiles (with export potential of more than 40 per cent).
This is a dual gain. What about the rest? Well, one shall not rush to an overwhelmingly positive conclusion. Caution is needed for a realistic assessment.
First, the trade issue remains relative. Neither India nor Pakistan falls in the category of the other’s top 10 trading partners, despite their consequent common border.
Even if there is no doubt these happenings are very encouraging and that joint ventures between the two neighbouring businessmen will be invaluable, many hurdles remain to be tackled for the trade big push. The devil is in the details. Non-trade barriers and sclerotic, heavy discretionary and unharmonised bureaucracy on both sides, the need for further ease of business visas and the existence of a quality control institution, are aspects which, if not addressed, will jeopardise the trade-peace process.
If Pakistan will benefit in some aspects, India will be the end-game winner as the situation stands now. Pakistan has lost a lot of its competitive advantages, largely self-inflicted. Many businesses have recently flown out for better pastures in Bangladesh; it is not sure these recent agreements will not make the bleeding worse. Some sort of capital controls may have to be envisaged.
Last but not least, we believe that tight trade foundations can bring regional peace (see the origin of the European Community) but in the case of these two countries, any unexpected fundamental political rupture in ties may immediately stop the process as history has proved. Yet, it is hoped that economic pragmatism is making its way into South Asia.
Dr Marie-Aimée Tourres is a senior research fellow at Universiti Malaya