A framework of barriers

Once again political differences between Pakistan and India have rendered SAFTA meaningless.

The hopes from SAFTA (South Asia Free Trade Agreement) were never too high as far as the trade liberalisation between Pakistan and India was concerned. It was a common perception that political differences between Pakistan and India would render Safta meaningless. The predictions came true at the conclusion of the second Safta ministerial conference in Kathmandu last month; Pakistan complained that India had decided to withdraw tariff concessions extended to Pakistan under the agreement. Indian side was quick in denying the accusation. However, it raised the question once again: “Can Safta be a meaningful regional trade agreement with the existing attitudes of Indian and Pakistani policy makers?”

One would have to look into the history of Safta ratification to comprehend the problem. At the time of Safta ratification in 2006 Pakistan had three options. The first one was not to ratify the Safta draft which was quite difficult as it would have brought bad name to the country. Second was to ratify Safta and provide ’Most Favoured Nation’ (MFN) status to India, enabling New Delhi to export its items to Pakistan subject to Safta’s positive list (abandoning the existing import regime vis-a-vis India). The third alternative for Pakistan was to deal with Safta and importable items list from India separately. Pakistan ratified the Safta keeping in view the third option limiting Safta tariff concessions for India to 773 items existing in a bilateral ’positive list’.

Pakistan decided to link free trade with India to a visible progress on political issues between the two countries including the Kashmir issue through a composite dialogue. Pakistan also presented the argument that opening up of trade with India would not be in favour of Pakistan as the latter’s trade balance with India was already negative.

India gave MFN status to Pakistan in 1996. However, Pakistan complains about excessive use of non-tariff trade barriers (NTBs) by Indian counterparts and feels that reduction in tariffs through MFN status is meaningless till NTBs prevail. Here it should be kept in mind that Indian NTBs are not Pakistan specific only. Even the office of United States Trade Representative (USTR), in its recent review of Indian trade policy has identified many NTBs. This leaves Pakistan not being able to prove that Indian NTBs are only aiming against it.

India side on the other hand feels that Pakistan is working against the spirit of Safta by limiting Indian imports to a positive list (that now contains more than 1000 items) and by not granting it MFN status.

Interestingly human beings, by instinct, don’t follow win-win paradigm. Most of the time we tend to follow win-lose paradigm (my victory should be at the cost of someone’s loss). However, India-Pakistan trade relations presents a lose-lose paradigm i.e., I don’t want to win and I would not let you win either.

This lose-lose paradigm followed by our policy makers is clearly evident in a recently conducted study by The State Bank of Pakistan (SBP). The study has been titled ’Implications of liberalising trade and investment with India’ and it calls for liberalisation of trade with India which, it believes, would benefit both the nations. It predicts that Pakistan would benefit more, with imports mopping up net savings ranging from US$ 400 to 900 million. The study estimates that if Pakistan opened up, bilateral trade volume could cross US$ 5.2 billion. The study also reveals that both countries had achieved only two per cent of the total trade potential during the past 25 years.

According to the report, 32 per cent of Pakistan’s export products were currently bought by India from other countries and constituted a third of its total imports. About 1,181 items worth US$ 3.9 billion, covering 45 per cent of the total items exported by Pakistan, were at par with India’s imports during 2004, it observes.

The report identifies that about 70.3 per cent of the common items exported from Pakistan have unit values less or equal to Indian imports’ unit values and there is a large scope for export of those items simply by producing the quality required in India.

The SBP study also identifies that India currently earns US$ 15 billion of export revenue from 2,646 common items being imported by Pakistan from other countries and analyses that in 2004 the unit value for Pakistan’s imports were more than unit value of Indian exports in 48.7 per cent of these items. 45 per cent of those common imports were not part of Pakistan positive list and hence their import from India was not allowed. Pakistan was losing out US$400 million dollars to 900 million dollars by importing those items from other sources.

Some of the recommendations of SBP report are rather senseless. However, Pakistan would have to open up its trade with India in order to test the validity of SBP’s hypothesis. This is a difficult task, especially keeping in view its record trade deficit which is predicted to cross US$ 12 billion by the end of current financial year. It is estimated that trade deficit with India would be US$ 1 billion during this financial year.

In my opinion Pakistan would not be willing to open up trade any further with India for the time being. There is no indication that India would reduce its NTBs (not only for Pakistan but for rest of the world too). At the same time India has made it clear to Pakistan that there cannot be a qualified implementation of SAFTA. India has the option to deny SAFTA benefits to Pakistan because it is not receiving similar benefits from Pakistan under the agreement. India also wants Pakistan to discuss the issue bilaterally, and is proposing another ministerial council meeting to review the issue in six months.

We have already observed that in case of a deadlock in multilateral trading regime (WTO) things start moving towards bilateral trading regime and countries tend to rely on free/preferential trade agreements with each other. The same holds true when things get stuck in regional trading agreements such as SAFTA. The increasing surge of FTAs within South Asia has already been pointed out Pakistan and India are individually trying to sign FTAs with their South Asian neighbours. Pakistan has already signed an FTA with Sri Lanka. Efforts are being made to do the same with Bangladesh.

India, on the other hand is a major partner in Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMST-EC). BIMST-EC comprises of Bangladesh, India, Myanmar, Sri Lanka and Thailand. This sub-regional group has already signed a framework free trade agreement and aiming to transform into a free-trade agreement in the long run. Nepal is receiving preferential trading arrangement with India.

So what is the fate of SAFTA? Keeping SAFTA aside another important question remains as to why Pakistani and Indian consumers should pay premium price for commodities they get through informal trade or through third country like Dubai or Singapore.

Looking at most recent trends, apart from daily food items, Pakistan is deficient in raw cotton and corrugated sheets that India may supply at a cheaper rate. Similarly India is deficient in wheat and can import from Pakistan. This would simplify the consumer’s life across the border. But committed political will from the top and a strong push from the bottom is required if the status quo is to be broken.

Our policy makers should think out of the box and should focus on complementarities with a pro-people approach. The aim should not be to sign another free trade agreement. Rather it should be to provide relief to common masses and to visualise a new South Asia free from hunger and poverty.