Can Arch Rivals India And Pakistan Be Trading, Not Sparring, Partners?

The case to revive trade came up again last week when Pakistan’s flamboyant foreign minister Mohammad Ishaq Dhar told newspersons in London that his country would “seriously” reconsider resuming trade ties with India, which it suspended 5 years ago. 

At stake is business worth at least US$10-12 billion, which is currently routed through Dubai and Singapore, according to unofficial estimates. A World Bank study suggests that trade between the two neighbours can easily be ratcheted up to US$37 billion by reducing taxes and removing bans on the import of Indian products by Pakistan.

Though the two countries have a history of routing trade through third countries because of non-tariff barriers, direct trade dropped drastically in 2018-19 when Pakistan banned Indian exports and India slapped a 200 per cent tariff on imports from her neighbour. 

Despite the ban by Pakistan on Indian exports, the occasional permission to import much-needed food or other goods such as onions, raw sugar has meant that even in April-January 2023, India exported goods worth $1.1 billion directly to Pakistan according to Commerce Ministry data, while Pakistan which faces a 200 per cent tariff for its goods in India managed to sell directly goods worth nearly $ 3 million.   

“Now that the PML-N led by Shehbaz Sharif is back in power there is a good chance that they will ease up on trade. There was always a section within that party, which was pro-trade with India. Many of the PML-N members are industrialists and may take a more pragmatic stance towards business,” TCA Raghavan, former High Commissioner to Islamabad told The Secretariat. 

Economy wise, Pakistan is between a rock and a hard place, with its foreign exchange reserves at roughly US$8 billion, barely enough to cover two months of essential imports and a debt to GDP ratio of over 70 per cent. IMF and credit ratings agencies estimate that the interest payments on its debt will soak up 50 per cent to 60 per cent of the government's revenues this year.

At the same time, inflation has been nearing the 30 per cent mark and the value of the Pakistani Rupee has plummeted to 275 rupees to a US dollar. 

“However, we have to remember the civilian government there is a weak one. Their (other) problem is that they don’t know how India will react to overtures. After all, New Delhi may well not go with the idea,” Raghavan added.  

Last year, India’s former spymaster Amarjit Singh Dulat, ex-Director of Research and Analysis Wing (RAW) predicted in an interview to a wire service that Prime Minister Narendra Modi may at some stage hold out the olive branch towards Pakistan and even “bailout” the neighbouring state, which has been in the throes of a political and economic crisis.

Benefits Beyond Peace Dividends

Besides the peace dividends that any trade deal may bring, commerce worth US$37 billion is a ‘big change’ for any country, especially India which has seen its exports stagnate if not decline in the last year. Its merchandise exports slipped to US$395 billion in April 2023-February 2024 compared to US$409 billion in the same period a year ago. 

“There is significant demand for goods from India in Pakistan and visa-versa. The ASEAN integration process has also shown us how trade with neighbours can have a multiplier effect on economic growth,” added Prof Biswajit Dhar, former Director General of Research and Information Systems for Developing countries. 

Historically, trade has fueled diplomacy and many analysts point out that trade could be raison d’etre for a new détente between the two estranged neighbours.

However, post-colonial South Asia has to date been a strange outlier where the usual laws of international relations don’t work. Here, more or less, international trade has been hostage to domestic politics, and wars have spoiled trade instead of spurring it.

“If we manage to open up the Pakistani frontier to trade, the other corollary is opening it up for travel and cargo movements. The Asian highway project connecting India and ASEAN countries to Western Europe was shelved and a new trade route has been planned, which is vulnerable to middle eastern tensions and crises like the Red Sea piracy upsurge. This could be a parallel alternative,” said Dhar. 

Easier Said Than Done

The fact of the matter is that since Pakistan and India waged a war in 1965, the two sides started restricting trade and travel with each other. And except for brief interludes, the two sides never got back to normalising trade, the one lubricant that smoothens all other difficulties elsewhere in the world.

Since the 1990s, India has tried to woo the Pakistani side with the olive branch of trade but Islamabad has then always insisted on according greater priority to resolving the border dispute. 

In 1996, India accorded the ‘Most Favoured Nation’ or MFN status to Pakistan in line with the World Trade Organisation norm that its member nations to give each other equally preferential treatment on cross-border flow of goods.

Pakistan, however, dilly-dallied over decades in reciprocating India's gesture. Those in the know say this was because in Urdu the WTO term transliterated to “Sab Se Pasandeeda Qoum”, which was a title politically unacceptable to the leadership to accord to a neighbour with which it had fought three-and-a-half wars.

The coin flipped after the Mumbai terror attack on November 26, 2008. India started insisting it would talk of a resolution of terror first and everything else could wait for a solution, while Pakistan wanted trade talks ahead of everything else.

Fast forward to 2019, following the abrogation of Article 370 of the Indian Constitution that gave Jammu & Kashmir a special status, Pakistan stopped whatever trade there was between the two nations. In the same year, India too slapped a 200 per cent tariff on Pakistani imports and rescinded the MFN designation.

Since then most of the trade between the two neighbours has been routed through third countries – such as UAE and Singapore. Two-way direct trade between the two countries which had stood at over US $ 2.5 billion in 2018-19, dropped suddenly to less than US $ 830 million after the almost tit-for-tat retaliatory trade measures in 2019-2020. Since then, it has ranged between US $ 329 million to US $ 1.13 billion, while pushing most trade through third countries.

Said global tea marketer Sovan Sircar, "The Middle East sells Indian tea, sometimes blended with tea from Sri Lanka and Kenya to a host of countries including Pakistan. Their gain is our loss."   

Experts believe that goods from India, ranging from Maruti spare parts and libido medicines to tea were routed to Pakistan via third countries at rates inflated by 25 per cent to 100 per cent. Pakistani textiles, sugar, marble and semi-precious stones similarly made their way from the Arabian coast by ship at higher rates.

The only ones to complain have been traders on both sides. Consumers, who lost out as the goods they bought from each other became costlier, remained oblivious of the price they were paying as the two sides refused to talk business with each other.