The Prospects for Indo-Pakistan Trade
January 07, 2014
Hafiz A. Pasha* and Muhammad Imran**
1.
Introduction
Trade between India and Pakistan has been fundamentally influenced by
factors that are not purely economic. At the time of Partition in 1947, both
economies were heavily interdependent, with the share of the Indian market in
Pakistan’s exports at close to one fourth, and over half of Pakistan’s imports
coming from India. Thereafter, bilateral trade has had a chequered history.
Trade virtually ceased after the wars of 1965 and 1971.
Some positive steps have been made since 1995, when India announced its decision
to grant most favored nation (MFN) status to Pakistan, and the latter established
a positive list with respect to imports from India. The signing of the South
Asian Free Trade Agreement (SAFTA) in 2004 was a major step forward in the
eventual establishment of a customs union in the region. Recently, Pakistan
announced its potentially landmark decision to grant MFN status to India by the
end of 2012. In the interim period, a restricted positive list has transitioned
to a negative list, which opens up a large percentage of tariff lines for
imports from India. Further, the two countries have agreed to simplify customs
procedures and facilitate the process of goods certification. India has also
announced that it welcomes investment by resident Pakistanis and companies.
Clearly, the
environment for bilateral trade has greatly improved. This augurs well for
future growth in trade between the two countries, who are making an effort to
move away from the old view of “peace first, trade later” to “trade now, peace
later.” It is hoped that the expansion of trade will create stronger
constituencies for peace in both countries.
The objective of
this chapter is to explore the possibilities of Indo–Pakistan trade in the new
environment. Section 1 describes the current level and pattern of bilateral
trade. Section 2 identifies some basic issues in the context of trade development
between the two countries. Section 3 quantifies the degree of trade
complementarity between the Indian and Pakistani economies. Section 4 describes
the levels of import tariffs in the two countries and their potential impact on
the volume of trade. Section 5 assesses the existing nontariff barriers (NTBs),
especially with regard to each other, and identifies the particular
restrictions that need to be removed for trade to flourish. Section 6 evaluates
the prospects for Indo–Pakistan trade, following the India’s granting of MFN
status and Pakistan’s reciprocal gestures in the form of relaxing certain NTBs.
2.
Trade Between
India and Pakistan
Both India and
Pakistan have become substantially more open economies over the last four
decades. The combined share of global imports and exports in India’s GDP was
less than 7 percent in 1970, but had risen to almost 32 percent by 2010. In
Pakistan’s case, the corresponding share has increased from 12 percent to 34
percent. Both countries have clearly realized the gains from global trade and
how this can contribute to faster economic growth.
This increase
in their degree of global openness is not, however, reflected in the trade
between the two countries. As shown in Table 13.1, Pakistan’s exports to India
are of a small magnitude—only 1 percent (as compared to over one fourth at the
time of Partition) of global exports and an insignificant portion of Indian
imports. India’s exports to Pakistan constitute only about 1 percent of its total
exports, and about 5 percent of the latter’s global imports (as compared to
over half at the time of Partition). Clearly, any potential gains from trade
have been sacrificed due to strained political relations.
Table 13.1: Trade between Pakistan and India, 2000/01–2010/11
Pakistani exports to India
|
|||
Year
|
Exports
(USD million)
|
As percentage of exports
|
As percentage of Indian imports
|
2000/01
|
56
|
0.8
|
0.1
|
2006/07
|
344
|
2.6
|
0.1
|
2009/10
|
268
|
1.9
|
0.1
|
2010/11
|
264
|
1.0
|
0.1
|
Indian exports to Pakistan
|
|||
Year
|
Exports
(USD million)
|
As percentage of exports
|
As percentage of Pakistani imports
|
2000/01
|
238
|
0.4
|
2.7
|
2006/07
|
1,236
|
1.1
|
5.1
|
2009/10
|
1,226
|
0.9
|
4.2
|
2010/11
|
1,734
|
0.9
|
4.9
|
Source: State Bank of Pakistan.
Indian exports to Pakistan have been restricted by the latter’s
positive list. Only 27 percent of the tariff lines are open for imports from
India (Table 13.2). The restriction is particularly severe in the case of
product groups such as prepared foods, footwear and personal articles,
textiles, ceramic and glass products, and vehicles and transport equipment. An
estimated 77 percent of India’s major exports (above USD 500 million) have been
excluded from access to the Pakistani market. However, despite limited access,
Indian exports have shown significant growth during the last decade, rising
from USD 238 million in 2000/01 to USD 1,734 million in 2010/11. At the same
time, while Pakistan enjoys MFN status with respect to India, its exports are
not only very small, they have also shown a declining trend since 2006/07.
Table 13.2: Positive list of items for import from India
Section of HC
|
Description
|
Total tariff lines
|
Lines in positive list
|
Percentage of tariff lines
|
I
|
Live animals, animal
products
|
248
|
33
|
13.3
|
II
|
Vegetables and products
|
311
|
157
|
50.5
|
III
|
Animal, vegetable fats/oils
|
53
|
2
|
3.8
|
IV
|
Prepared foodstuffs
|
228
|
11
|
4.8
|
V
|
Mineral products
|
195
|
74
|
37.9
|
VI
|
Chemicals or allied
industries
|
1,149
|
574
|
50.0
|
VII
|
Plastics and articles
|
300
|
93
|
31.0
|
VIII
|
Hides and skins, leather
goods
|
92
|
45
|
48.9
|
IX
|
Wood and articles
|
106
|
52
|
49.1
|
X
|
Paper and paper board
|
182
|
37
|
20.3
|
XI
|
Textiles and articles
|
929
|
104
|
11.2
|
XII
|
Footwear and personal
articles
|
59
|
2
|
3.4
|
XIII
|
Ceramic and glass products
|
189
|
28
|
14.8
|
XIV
|
Jewelry, etc.
|
55
|
5
|
9.1
|
XV
|
Metals and articles
|
744
|
156
|
21.0
|
XVI
|
Machinery
|
1,193
|
353
|
29.6
|
XVII
|
Vehicles and transport
equipment
|
245
|
15
|
6.1
|
XVIII
|
Optical and precision
instruments
|
269
|
103
|
38.3
|
XIX
|
Arms and ammunition
|
52
|
-
|
-
|
XX
|
Miscellaneous
|
186
|
5
|
2.7
|
XXI
|
Works of art
|
72
|
1
|
1.4
|
Total
|
6,857
|
1,870
|
27.3
|
HC = Harmonized code.
Note: The percentage of tariff
lines may not necessarily correspond to the percentage of imports.
Source: Pakistan, Ministry of
Commerce (2012).
Tables 13.3
and 13.4 show the two countries’ trade composition. As Table 13.3 indicates, two
relatively large Indian exports to Pakistan were cotton (USD 372 million) and
sugar (USD 69 million) in 2010/11—the year in which Pakistan was hit by devastating
floods that badly affected standing crops. This is a classic example of how
shortages can be met by a neighboring country, albeit at commercial terms.
Other significant imports from India include soya bean oil cake, vegetables,
chemicals, artificial staple fiber, and tea. It is interesting that the share
of agricultural exports to Pakistan is almost 30 percent. This is in contrast
to the pattern of trade at the time of Partition when India exported mostly manufactured
consumer goods and imported agricultural items, such as cotton and wheat.
Table 13.3: Pakistan’s major imports from
India, 2010/11 and 2011/12
HS code
|
Item description
|
July–May (USD million)
|
|
2010/11
|
2011/12
|
||
(> USD 50 million)
|
|||
0702
|
Tomatoes, fresh or chilled
|
41
|
68
|
0713
|
Leguminous vegetables
|
40
|
52
|
1701
|
Sugar
|
69
|
0
|
2304
|
Soya bean oilcake
|
122
|
202
|
2902
|
Cyclic hydrocarbons
|
166
|
191
|
5201
|
Cotton
|
372
|
75
|
(> USD 20 million – ≤ 50
million)
|
|||
0902
|
Tea
|
26
|
36
|
1209
|
Seeds for fruits
|
20
|
17
|
2933
|
Heterocyclic compounds
|
25
|
29
|
3204
|
Synthetic organic coloring
matter
|
23
|
26
|
3817
|
Mixed alkyl benzenes
|
17
|
24
|
3901
|
Polymers of ethylene
|
3
|
20
|
3902
|
Polymers of propylene
|
23
|
35
|
5504
|
Artificial staple fiber
|
11
|
35
|
7202
|
Ferro alloys
|
25
|
18
|
7311
|
Containers for compressed
gas
|
24
|
11
|
Subtotal
|
982
|
839
|
|
Total
|
1,367
|
1,144
|
|
Percentage of subtotal
|
72
|
73
|
|
Source: State Bank of Pakistan.
Pakistan’s major
exports to India are dates, cement, textiles, and certain chemicals. The export
volumes are relatively small, as shown in Table 13.4. As opposed to its substantial
imports of cotton from India in 2010/11, Pakistan exported cotton (USD 60
million) to India in 2011/12. There is also evidence of some intra-industry
trade in sectors such as chemicals. A further promising sign is the emergence
of some new exports to India, such as leather, woven cotton fabrics, and medical
and surgical instruments, which are among Pakistan’s major global exports.
Table 13.4: Pakistan’s major exports to India, 2010/11 and
2011/12
HS code
|
Item description
|
July–May (USD million)
|
|
2010/11
|
2011/12
|
||
(> USD 10 million)
|
|||
0804
|
Dates
|
44
|
48
|
1006
|
Rice
|
13
|
1
|
2520
|
Gypsum
|
1
|
11
|
2523
|
Cement
|
39
|
33
|
2707
|
Oils from coal tar
|
14
|
0
|
2710
|
Oils from petrol
|
15
|
11
|
2917
|
Polycarboxylic acid
|
12
|
16
|
5201
|
Cotton
|
0
|
60
|
5205
|
Cotton yarn
|
9
|
11
|
5209
|
Woven cotton fabrics
|
8
|
10
|
(> USD 5 million – ≤ 10 million)
|
|||
2903
|
Halogenated derivatives
|
8
|
7
|
4107
|
Leather
|
8
|
7
|
5103
|
Waste from wool
|
7
|
4
|
6305
|
Sacks/bags of textile material
|
5
|
5
|
9018
|
Medical and surgical instruments
|
5
|
5
|
Subtotal
|
203
|
230
|
|
Total
|
268
|
311
|
|
Percentage of subtotal
|
76
|
74
|
|
Source: State Bank of Pakistan.
Given its relatively large, growing volume of imports from
India, and small, declining volume of exports to India, Pakistan has a relatively
large trade deficit with respect to India, estimated at over USD 900 million in
2011/12. This has fueled arguments on the part of opponents of trade liberalization
that further opening up will lead to a flood of Indian imports[i] to the
detriment of Pakistani industry. It must, however, be recognized that, to the
extent that imports from India represent “trade diversion” at lower prices—especially
with lower transport costs—from other sources, then while the trade balance
with respect to India may deteriorate, the global balance of trade could improve.
3.
Key Issues
The current level, pattern, and balance of trade between India and
Pakistan raise a number of key issues. First, why have Pakistani exports
performed poorly in India, despite the former’s MFN status? There are a number
of possible reasons for the low and declining volume of exports to India.
1.
The trade
complementarity between Pakistani exports and Indian imports may be low. In
other words, Pakistan is not producing and exporting many of the goods that
India imports globally. Therefore, there is low scope for diversion of Indian
imports to Pakistan.
2.
The regime of
import tariffs and para-tariffs in India could be providing more effective
protection to sectors in which Pakistan might potentially have a relative
comparative advantage, for example, in some agricultural items and textiles.
3.
India has a
restrictive trade regime relative to other developing countries in terms of the
range and intensity of NTBs. Additionally, it might be applying some of these
barriers more rigorously to Pakistan, effectively raising costs for Pakistani
exporters and precluding their access to the large Indian market.
As opposed to
this, despite the limited positive list, Indian exports to Pakistan have done
fairly well and shown rapid growth. This could be for the reasons below.
1.
Given the two
countries’ relative level of development, especially in terms of the extent of
diversification of the industrial base, there is a high level of trade
complementarity between Indian exports and Pakistani imports. Consequently,
following Pakistan’s granting of MFN status to India, imports could rise
substantially, especially due to diversion from more expensive sources.
2.
Pakistan has a relatively more liberal trade regime. Generally, it has
managed its protection policy for different economic activities primarily
through import tariffs (and SROs); the presence of NTBs is limited. This has
encouraged market penetration by Indian exporters.
Beyond the
granting of MFN status to India, the final phase of trade liberalization in
South Asia under SAFTA is expected to reach completion by 31 December 2012. At
this stage, items in all tariff lines (except those on each member country’s
sensitive list) will see import tariffs being reduced to 5 percent or less.[ii] The
question is the extent to which this will further improve access for Indian
exports to Pakistan. Is there even the possibility of some “trade creation”
whereby Indian products begin to displace Pakistani products, and not just Pakistan’s
imports from other countries? Simultaneously, will lower Indian import tariffs
provide greater opportunities to Pakistan exports?
It needs to be
emphasized that, in the short to medium term, the prospects of raising
Pakistani exports, both globally and specifically, to India, are limited by
severe supply-side constraints. These include record levels of power load-shedding,
and gas and water shortages, which have restricted the extent of capacity utilization.
Simultaneously, private investment in Pakistan is at an all-time low.
The subsequent sections attempt to answer the questions raised above. First,
we quantify the extent of trade complementarity between the two countries. This
is followed by a comparison of their tariff regimes and incidence of NTBs.
Based on these analyses, we assess the prospects for Indo–Pakistan post-31 December
2012, following the granting of MFN status to India and completion of the trade
liberalization process under SAFTA.
4.
The Extent of
Trade Complementarity
We develop the
following index of trade complementarity between two countries:
where TCI = trade
complementarity index between countries j
and k, mik = the share of the ith commodity in the total imports of country k, and xij = the
share of the ith commodity in the
total exports of country j. The
higher the magnitude of TCI, the greater will be the trade complementarity
between the two countries.
The TCI has
been estimated at the 4-digit HC level of India and Pakistan. The resulting magnitudes
are as follows:
1.
TCI between Indian
exports and Pakistani imports = 0.420
2.
TCI between
Pakistani exports and Indian imports = 0.082
Therefore,
there is clear evidence that India is in a position to potentially export more
items to Pakistan than the reverse. This is a major factor explaining the
substantially larger volume of exports from India to Pakistan, even in the
presence of the positive list. Table 13.5 lists significant Indian exports
(above USD 250 million) that are also significant imports for Pakistan (above USD
100 million) for 2010/11. It shows that ten major Indian exports on Pakistan’s
positive list had a potential export value of USD 3.7 billion in the latter
country. Actual exports in 2010/11 were worth USD 1.1 billion, implying that
India’s share in these exports was almost 30 percent. This share could increase
further after the tariff reductions by Pakistan under SAFTA.
Following its
transition to full MFN status and reduction in tariffs under SAFTA, a further
market of over USD 11 billion potentially opens up for India in Pakistan,
consisting primarily of the trade diversion of previously banned imports. If
the market share in the old positive list rises to, say, 50 percent while that
for new items reaches 30 percent in the medium term, Indian exports could rise
to over USD 5 billion.
Table 13.5: Simultaneously significant Indian exports and Pakistani
imports, 2010/11 (at 4-digit HC level)
No.
|
Code
|
Description
|
Volume of global
|
Pakistan’s imports from
India
|
|
Indian exports
|
Pakistani imports
|
||||
Included in positive
list*
|
(USD million)
|
||||
1
|
0902
|
Tea
|
708
|
311
|
24
|
2
|
1701
|
Sugar
|
1,196
|
691
|
335
|
3
|
2304
|
Soya bean oil cake
|
2,057
|
142
|
51
|
4
|
2902
|
Cyclic hydrocarbons
|
1,594
|
467
|
185
|
5
|
2933
|
Heterocyclic compounds
|
600
|
113
|
11
|
6
|
3204
|
Synthetic coloring matter
|
1,249
|
162
|
7
|
7
|
3808
|
Insecticides, etc.
|
1,140
|
195
|
25
|
8
|
3902
|
Polymers of polypropylene
|
771
|
435
|
17
|
9
|
4011
|
New rubber tyres
|
1,029
|
144
|
42
|
10
|
5201
|
Cotton, not carded or combed
|
2,866
|
1,031
|
406
|
Total
|
13,210
|
3,691
|
1,103
|
||
Not included in
positive list
|
|||||
11
|
2711
|
Petroleum products
|
41,076
|
8,261
|
|
12
|
3004
|
Medicaments n.e.s.
|
5,637
|
194
|
|
13
|
5402
|
Synthetic filament
yarn
|
774
|
392
|
|
14
|
7208
|
Flat rolled products of steel
|
862
|
267
|
|
15
|
7210
|
”
|
1,384
|
283
|
|
16
|
8471
|
Automatic data processing machines
|
285
|
103
|
|
17
|
8502
|
Electrical generating sets
|
342
|
289
|
|
18
|
8517
|
Electric apparatus for telephony
|
3,329
|
518
|
|
19
|
8703
|
Motor vehicles for transporting
persons
|
4,211
|
477
|
|
20
|
8704
|
Motor vehicles for transporting goods
|
619
|
142
|
|
21
|
8708
|
Parts and accessories for motor
vehicles
|
2,189
|
120
|
|
22
|
8711
|
Motorcycles
|
856
|
100
|
|
23
|
9018
|
Medical, surgical, and
dental instruments
|
414
|
125
|
|
Total
|
61,978
|
11,271
|
|||
* Note that not all items at the 8-digit level are part
of the positive list.
Items in italics are on Pakistan’s sensitive list.
Sources: India,
Ministry of Commerce and Industry (2012) (figures in last column); State Bank
of Pakistan.
There are two other possibilities. The first is the diversion of
informal trade—currently routed through the UAE, Singapore, and Iran or
smuggled across the border—to formal channels after most items become
importable from India. The volume of informal trade was estimated by the
Sustainable Development Policy Institute (2007) at USD 500 million, and has by
now probably increased to USD 1 billion. The second prospect is that of some
“trade creation” with India, especially in products where tariffs are high
(currently at 20 to 30 percent), which do not feature on the sensitive list,
and which consequently experience a significant reduction in the tariff rate.
Estimating the magnitude of trade creation requires detailed micro-studies of
different sectors, which is the subject of further research.
Within the limited trade complementarity of
Pakistani exports and Indian imports, we identify trade prospects following the
relaxation of some NTBs (discussed in a subsequent section) and reduction in
tariffs by India under SAFTA. Table 13.6 gives a list of potentially larger
exports to India.
Table 13.6: Simultaneously significant* Pakistani exports
and Indian imports*, 2010/11 (at 4-digit HC level)
No.
|
Code
|
Description
|
Volume of global
|
Potential diversion to
India**
|
|
Pakistani exports
Xi
|
Indian imports
Mi
|
||||
(USD million)
|
|||||
1
|
0804
|
Dates, figs, etc.
|
100
|
180
|
100
|
2
|
1001
|
Wheat
|
310
|
133
|
133
|
3
|
2523
|
Cement
|
496
|
77
|
77
|
4
|
3004
|
Medicaments n.e.s.
|
56
|
764
|
56
|
5
|
3907
|
Polyesters, primary
|
265
|
1,024
|
265
|
6
|
4102
|
Leather
|
79
|
60
|
60
|
7
|
5007
|
Woven fabrics of silk
|
50
|
129
|
50
|
8
|
5201
|
Cotton, not carded or combed
|
519
|
56
|
56
|
9
|
5208
|
Woven cotton fabrics
|
519
|
159
|
159
|
10
|
5209
|
Woven cotton fabrics
|
936
|
60
|
60
|
11
|
5407
|
Woven fabrics of synthetic yarn
|
59
|
107
|
59
|
12
|
6006
|
Other knitted fabrics
|
67
|
112
|
67
|
13
|
6403
|
Footwear
|
72
|
56
|
56
|
14
|
7113
|
Articles of jewelry
|
158
|
338
|
158
|
15
|
9018
|
Surgical instruments
|
295
|
1,028
|
295
|
16
|
9506
|
Sports articles
|
342
|
118
|
118
|
Total
|
4,323
|
4,401
|
1,769
|
||
* At least USD 50 million
each.
** Corresponding to Min[Xi, Mi]
for the ith product.
Items in italics are on India’s sensitive list.
Source: India, Ministry of Commerce
and Industry (2012); State Bank of Pakistan.
Major Pakistani exports that could be further diverted to the Indian
market (in view of lower transport costs) include dates, cotton, primary
polyester, woven cotton and silk fabrics, jewelry, and sports articles. The
quantum of total trade diversion is estimated at USD 1.8 billion (Table 13.6).
If about 50 percent diversion takes place, exports could reach USD 900 million,
as compared to USD 350 million currently. The prospect of such diversion—and
possibly some trade creation—would improve if India were to relax some of its
NTBs and if present impediments to trade were removed. Moreover, the
competitive position of Pakistani exports to India would be enhanced if the
SAFTA tariff reductions were implemented.
5.
Tariff Policies
The low trade
complementarity between Pakistani exports and India exists primarily because Pakistan
does not have a diversified exports base and its two product groups—agricultural
items and textiles—account for 60 percent of its total exports. These are also
major exports of India with a share of 17 percent. Of course, if free trade
were to take place, a degree of specialization could develop, depending on
relative comparative advantage. Pakistan could then find “niche” markets in
India for a range of products from the two sectors.
The possibility of intra-industry trade has been largely precluded by the
tariff policies pursued by India and support provided in the form of relatively
large subsidies, especially to agriculture. Table 13.7 compares the level and
pattern of import tariffs in the two countries, demonstrating that customs
duties on agricultural products are significantly higher in India. For example,
in cereals, and fruits and vegetables, India’s average tariff on imports is 30–32
percent as compared to 18–19 percent in Pakistan. As opposed to this, Pakistan generally
offers its domestic industry more protection.
Duty rates on
textiles and clothing also appear to be lower in India than in Pakistan. This
is the case for ad valorem duties, but India operates a dual tariff structure
in these product groups with an ad valorem or specific duty, whichever is
higher. Generally, the specific duties appear to be far higher and, in some
cases, exceed 100 percent, especially on value-added textiles (see Table 13.8).
These rates are even higher than India’s tariff bindings with the World Trade
Organization (WTO) in some cases. Pakistan, however, operates a normal ad
valorem duty structure in clothing and textiles.
Table 13.7: MFN-applied tariffs by product
group in India and Pakistan*
Product group
|
India
|
Pakistan
|
Animal products
|
33.1
|
14.6
|
Dairy products
|
33.7
|
30.0
|
Fruit, vegetables,
plants
|
30.4
|
18.2
|
Coffee, tea
|
56.3
|
12.8
|
Cereals and preparations
|
32.2
|
18.8
|
Oilseeds, fats, and oils
|
18.3
|
8.8
|
Sugars and confectionery
|
34.4
|
17.2
|
Beverages and tobacco
|
70.8
|
52.5
|
Cotton
|
12.0
|
7.0
|
Other agricultural products
|
21.7
|
6.7
|
Fish and fish products
|
29.8
|
10.6
|
Minerals and metals
|
7.5
|
12.4
|
Petroleum
|
3.8
|
10.7
|
Chemicals
|
7.9
|
9.6
|
Wood, paper, etc.
|
9.1
|
15.5
|
Textiles
|
14.7
|
16.7
|
Clothing
|
13.4
|
24.8
|
Leather, footwear, etc.
|
10.2
|
14.9
|
Nonelectrical machinery
|
7.3
|
9.3
|
Electrical machinery
|
7.2
|
14.7
|
Transport equipment
|
20.7
|
24.7
|
Manufactures, n.e.s.
|
8.9
|
13.1
|
* For latest year for which
information is available.
Source: World Trade Organization, country tariff profiles.
Table 13.8: Distribution of effective ad valorem tariffs on
textiles in India
Range (%)
|
Rate (%)
|
Percentage
|
0 to 10
|
35
|
15.7
|
Above 10 to 25
|
83
|
37.2
|
Above 25 to 50
|
61
|
27.4
|
Above 50 to 100
|
31
|
13.9
|
Above 100
|
13
|
5.8
|
223
|
100.0
|
Source: Authors’ estimates.
India also
operates an elaborate subsidy regime in agriculture. Subsidies on agricultural
inputs such as fertilizer, power, water, tractors, and seeds, etc., exceed 5 percent
of GDP (Institute of Public Policy, 2012). The corresponding magnitude for
Pakistan is 1 percent of GDP. It must, of course, be recognized that the
agricultural subsidies are WTO-compliant, but their high level in India has
served to make domestic production artificially competitive in relation to
imports.
Overall, India’s
tariff and subsidy regimes for agricultural products and tariffs on textiles
and clothing have effectively restricted imports. For Pakistan, the consequence
has been limited access of its traditional exports to the Indian market. It is
worth noting that these two product groups also feature prominently in SAFTA’s
sensitive list. As such, the process of trade liberalization is unlikely to
provide a significant new opening to Pakistani exporters.
As a special concession, India has recently offered Bangladesh duty-free
access to a range of textile products, including readymade garments. This is
presumably justified on the grounds that Bangladesh is a least-developed country
member and merits special treatment. However, in the negotiations prior to
granting India MFN status, Pakistan should seek the withdrawal of the specific
duties on textiles and clothing and application only of the ad valorem duties.
6.
Nontariff Barriers
The perception
in Pakistan is that India operates a generally restrictive trade regime in the
form of a wide range of NTBs, some of which are applied more strictly on
Pakistani consignments. The following sections list the two countries’ NTBs.
6.1.
NTBs in India
According to the
WTO (2011), India operates the following key NTBs.
- Sanitary and phytosanitary (SPS) measures are harmonized
with international standards and cover mostly food items.
- The import licensing and permit regimes are complex,
varying according to product or user.
- There are a large number of notifications specifying
mainly sampling and testing procedures as well as labeling and packaging
requirements for food products, pharmaceuticals, textiles, etc.
- Quarantine is imposed on animals and plants.
- Some goods can only be imported through specified ports
and/or by particular agencies.
- Pre-shipment inspection is mandatory for some goods such
as metal scrap, textiles, etc.
-
India actively uses antidumping duties and countervailing measures.
6.2.
NTBs in Pakistan
Compared to those
listed above, Pakistan operates fewer, less rigorous NTBs, listed below.
- Pakistan’s main trade policy instrument is the tariff
regime (including SROs) rather than NTBs.
- Pakistan’s SPS legislation is outdated and not
effectively applied.
-
Imports of products such as pharmaceuticals, agricultural products, and
engineering goods require clearance by the relevant ministry/agency.
- Import restrictions are applied for health, safety,
security, religious, and environmental reasons.
- State trading agencies (such as the TCP) play a
dominant role in the import of agricultural inputs and products.
-
Pakistan seldom resorts to antidumping and countervailing measures.
The World Bank
(2012) has developed an overall trade restrictiveness index (OTRI), which
calculates the equivalent uniform tariff of a country’s tariff schedule and
NTBs that would maintain the overall import level. NTBs covered by the index
include price control measures, quantity restrictions, monopolistic practices,
SPS and technical regulations, and agricultural support.
Table 13.9
presents the OTRI for a sample of Asian countries. India has the highest OTRI,
not only among countries in South Asia but also in relation to the sample of
countries in the rest of Asia. The impact of NTBs on the magnitude of the OTRI
also appears to be relatively high in India’s case. A comparison with Pakistan
reveals clearly that NTBs play a far less dominant role than in India. This
point needs to be stressed in ongoing negotiations with India.
Table 13.9: OTRI in a sample of Asian countries
Country
|
OTRI
|
Percentage increase in
OTRI due to NTBs
|
South Asia
|
||
Bangladesh
|
23.8
|
0.8
|
India
|
46.7
|
24.5
|
Nepal
|
16.1
|
0.0
|
Pakistan
|
22.2
|
5.1
|
Sri Lanka
|
9.9
|
0.0
|
East Asia
|
||
China
|
21.2
|
9.9
|
Malaysia
|
39.7
|
30.0
|
Philippines
|
34.5
|
30.5
|
Thailand
|
22.8
|
8.1
|
Rest of Asia
|
||
Turkey
|
15.1
|
2.7
|
Source: World Bank (2012).
Specific
impediments to trade between India and Pakistan include the following.
1.
Severe visa
restrictions by both countries make it difficult for businesspersons from one
country to develop contacts/markets in the other.
2.
Restrictions on
the choice of routes that can be used to transport goods constrain trade. For
example, Pakistan limits the use of the Atari–Wagah border overland route to
137 goods from India.
3.
There is limited capacity for transport on overland routes, especially
the availability of wagons from Pakistan Railway. In addition, there are no
testing or quarantine facilities at the check-post at Atari–Wagah. There is no
e-filing system in operation at the border customs, leading to significant delays,
frequently for security reasons.
4.
In some cases, the testing and certification required under SPS measures
and technical barriers to trade take considerable time in India.
5.
Banking channels remain
underdeveloped in the absence of bank branches in one country of banks in the
other. This has created problems in honoring letters of credit. Payments
through the Asian Clearing Union are also subject to long delays.
These impediments appear to have had a
major impact on the volume of trade between the two countries. Fortunately,
some steps have recently been taken to improve the situation. The countries
have reached a bilateral agreement to expedite customs clearance on accepting
each other’s certification of goods. There are ongoing discussions on a visa
protocol to facilitate longer, more frequent by businesspersons. Overall, it is
clear that NTBs are generally more restrictive in India, especially on agricultural
items. There are also a number of specific impediments to bilateral trade, which,
if removed, could significantly enhance the volume of trade.
7.
Prospects
for Indo–Pakistan Trade
The chapter has demonstrated that granting MFN status to
India, rationalizing tariffs on Pakistani products by India, and mutual efforts
to remove specific impediments to trade could substantially enhance the volume
of trade between the two countries. A number of other studies have already
reached this conclusion, including those by Batra (2004), Nabi and Nasim (2001),
the State Bank of Pakistan (2006), Sayeed (2005), Kemal, Abbas, and Qadir (2002),
Hussain (2011), and Taneja (2007). Such studies have adopted different approaches
to demonstrate that the potential volume of trade could be a multiple of its present
level.
Following the granting of MFN status,
there is considerable scope for the diversion of imports by Pakistan to India,
especially in product groups such as chemicals, pharmaceuticals, iron and
steel, electrical appliances, plant and machinery, motor vehicles, and
transport equipment. The gains to Pakistan would be in the form of lower prices
(especially due to India’s proximity and the resulting lower transport costs).
The State Bank of Pakistan (2006) estimates that the diversion of trade to
India could confer savings in the import bill of over USD 1 billion.
There is also the likelihood of some “trade creation” following
the implementation of SAFTA, especially in items that are currently not
imported but could witness the entry of Indian products as the result of a
sizeable fall in the rate of customs duty from 20–30 percent to 5 percent. In
addition, informal imports through various channels from India could shift to
official imports. Overall, in the medium term, it is estimated that imports
from India could rise to almost USD 7 billion to 8 billion, especially if there
is significant trade creation. This would more-than-quadruple the present level
of imports. If this happens, India could become one of Pakistan’s largest
trading partners in Asia, along with China and the Middle East countries.
On the export side for Pakistan, the prospects appear somewhat
more limited. The outcome depends on the extent to which India eases both
general and Pakistan-specific barriers to trade, and rationalizes tariffs,
especially on textiles. The reduction of duties under SAFTA may not be of great
benefit because its sensitive list protects agriculture and textiles. Indian
duties on manufactured goods, except textiles and clothing, are relatively low
and, consequently, the extent of tariff reduction under SAFTA will not be so
pronounced. Overall, Pakistan would do well if it were able to increase its
exports to India to USD 1 billion from the present level of about USD 350
million in the next few years. This would nearly treble its exports to India.
It needs to be emphasized that there are threats to realizing this
quantum jump in bilateral trade. First, industries in Pakistan that have
traditionally enjoyed high levels of effective protection will lobby for the negative
list, including their products, to be retained beyond 31 December 2012 on the
grounds that they fear “serious injury” due to the opening of trade following
full trade normalization with India. While Pakistan adheres to its commitment
to grant MFN status, it may be necessary to enhance the institutional capacity
of the Ministry of Commerce and National Tariff Commission to investigate
complaints of serious injury and take appropriate safeguard measures, if
necessary, permissible under the WTO and SAFTA.
Second, there are likely to be elements
in India who are opposed to granting any concessions to Pakistan in
negotiations on the future bilateral trading regime. This may include not only
right-wing political forces, but also, potentially, certain industries such as
textiles and clothing.
Third, the prospects of an increase in Pakistan’s
trade deficit with respect to India will fuel arguments on the part of
right-wing elements and industrial lobbies in the country that the process of
liberalization has been to India’s advantage and that Pakistan has lost the
major leverage it had with regard to resolution of the longstanding Kashmir problem.
It will be necessary to convey the message that, while the trade deficit with
respect to India may worsen, the global balance of trade will simultaneously
improve due to cheaper imports from India. A powerful way of establishing this
point may be to demonstrate the large consumer welfare gains that could accrue
in a range of products, including certain basic food items, medicines, personal
care items, electrical goods, and transport equipment (especially for public
transport).
Finally, the recent improvement in the
trading environment between the two countries can only be sustained if both
pursue a policy of reciprocity and mutual cooperation, and if political
relations are not strained and security concerns not heightened. It is possible
that the expansion of trade between the two countries will facilitates the
process of composite dialogue and confer a large peace dividend in the not-so-distant
future.
* The author is dean of the School
of Liberal Arts and Social Sciences at Beaconhouse National University, Pakistan. This chapter is republished by kind permission of the Lahore Journal of Economics, 17
(Special edition) (September 2012), pp. 293–313.
** The author is a research associate at the Institute of
Public Policy at Beaconhouse National University, Pakistan.
[i] The same concern was voiced when the Free Trade
Agreement (FTA) was signed. However, although Chinese exports have reached USD
4.5 billion, many Pakistani industries have withstood the FTA well.
[ii] Pakistan has already notified vide SRO 558(1)/2004 the
schedule of reduction of customs duties under SAFTA on different items by 31
December 2012.
Labels: Pakistan, Pakistan Economy, Pakistan: Moving the Economy Forward, Publications
posted by S A J Shirazi @ 1/07/2014 10:21:00 AM,
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