Pakistan and India Plan to Increase Trade

Sources:
The Diplomat: Most Favoured India?
FT: Islamabad Looks to India to Aid Economy
FT: Pakistan and India in Historic Trade Push
FT: Pakistan Takes Giant Step with Trade Move
Livemint: PM-Level Talks between India, Pakistan Likely in November
Reuters India: India-Pakistan Trade Deal is but a First Step
WTO: Principles of the Trading System

Representatives from India and Pakistan met earlier this month and agreed in principle to the most extensive measures to promote trade between the countries since they were granted their independence from Britain in 1947. The countries aim to increase their bilateral trade to $6 billion annually within three years from the current $2.7 billion annually. The countries’ commerce secretaries plan to meet in India in November to finalize the trade agreement.

Pakistani political and military officials have previously insisted that trade agreements be conditioned on the resolution of a territorial dispute over Kashmir (a Muslim-majority region divided among India, Pakistan, and China), but they have backed away from this stance. The countries discussed a trade agreement in November 2008, but India halted negotiations after a Pakistan-based terrorist group killed 166 people in Mumbai. The two countries’ prime ministers did not meet again until March 2011, when Indian Prime Minister Manmohan Singh engaged Pakistani Prime Minister Yousuf Raza Gilani in “extremely positive and encouraging” talks while the latter was in India to watch the India-Pakistan semi-final match of the cricket World Cup.

The proposed trade deal includes an agreement by Pakistan to ease visa restrictions for business leaders in India and Pakistan and to allow goods and services to travel more freely between the two countries. Pakistan’s decision to consider easing trade restrictions with India was spurred primarily by the relatively poor performance of its economy. Pakistan’s 3% growth rate lags behind China’s and India’s 8% growth rates, and increased budget deficits and debt threaten Pakistan’s long-term economic viability. Pakistan anticipates that increased trade with India will promote its export industries, which is an effective way to generate jobs and boost the local economy. A better economic outlook may slow the “brain drain” (a phenomenon in which the best and brightest citizens seek work abroad) and convince its citizens to remain in Pakistan and contribute to its economic development. Another reason for Pakistan’s policy shift is due to improved relations with India following India’s acquiescence in allowing Pakistan to have preferential European Union (EU) market access following last year’s floods in Pakistan. Furthermore, Pakistan may fear being left behind, both politically and economically, after India signed a similar free trade agreement with Afghanistan last week.

Business leaders in Pakistan anticipate that the easing of restrictions will benefit the Pakistani cement, textiles, agriculture, and engineering industries (industries that produce products India desires, and Pakistanis cannot wholly afford), but others fear that opening up Pakistan to India’s generic drug industry and Bollywood (India’s entertainment industry)will destroy Pakistan’s pharmaceutical and entertainment industries. Nevertheless, officials in both countries believe the deal will benefit both economies.

Although Pakistani and Indian officials are optimistic that they will reach a deal, a degree of doubt is warranted. Pakistani-based militant attacks often accompany diplomacy between the two countries, and a Kashmiri group, the United Jihad Council, has threatened “grave consequences” if Pakistan cooperates with India. If an attack resembling the Mumbai attack of November 2008 or a violent uprising in Kashmir occurs, trade negotiations may fall apart and the prospect of economic development could be put on hold. Regardless, the renewed effort to set aside political differences is encouraging.