Trade with India — a small step
By Shahid Javed Burki
Monday, April 06, 2009
THE Economic Coordination Committee of the Cabinet in its meeting held on March 19, 2009 took a small step to regularise trade with India.
It authorised the ministry of commerce to start building the WagahAttari crossing near Lahore as an important point of entry and exit for facilitating trade between the two countries.
It also permitted the ministry to increase the number of items that could be exchanged to more than 1938, the currently permitted limit. The ECC announcement promised further liberalisation contingent upon the development of infrastructure on both sides of the border . While this is a positive development, it is still a baby step in an area that could do with some bold initiatives from the leadership in both the countries.
The decision by the cabinet committee was presumably taken under the provisions of the South Asia Free Trade Area agreement (Safta). The agreement was signed in Islamabad by all countries of the South Asian Arrangement for Regional Cooperation in January 2004. Creating a free trade area in South Asia was an important objective of the Saarc initiative when it was launched in Dhaka by the then Bangladesh president General Zia ur Rahman.
No progress was made for almost two decades largely on account of the continuing hostility between India and Pakistan, the region’s two largest economies. The near-war between two countries in 2001-02 when hundreds of thousands of troops were massed on both sides of the Indo-Pakistan border almost killed the entire enterprise. It was saved when the two leaderships recognised that persistent hostility was economically very costly for both the countries.
The Saarc’s leader wished to create a customs union in the region of the type that had propelled the countries of the European Union towards economic prosperity and political tranquility. Given the decades long hostility among the countries of the region, in particular between India and Pakistan, the South Asian leadership wished to be cautious in its approach. The Safta was designed to move slowly towards the creation of real free trade area, allowing time for the participating countries to absorb the gradual opening up that was envisaged.
It was right for the leaders to proceed very deliberately, but not right to be so slow in their movement that the advance they were making did not become apparent to the markets. Markets don’t respond well when signals are weak and subtle. They look to clear public policy guidance.
The Safta, at least in theory has been operational for a couple of years but it has yet to produce tangible economic effects. In a series of articles I contributed to Dawn while the Safta was being prepared for ratification by the governments of the region, I argued that Pakistan, being the smaller economy compared to India, would benefit more from the opening of the Indian border to its producers. That was the experience of all small countries that entered regional of arrangements with their larger neighbors in other parts of the world. Thus Mexico has gained more than the United States from NAFTA, Argentina more than Brazil from Mercosur, the smaller countries of Europe more than the larger ones from the expansions of the European Union. There is no reason why Pakistan’s experience from Safta should be any different.
The decision by the ECC to expand the size of the negative list was indeed a small step; no only that, it is in the wrong direction. By continuing with the “positive list” approach as the way of controlling trade with India, Pakistan is persisting with a practice that trade economists have long argued is inefficient and permits rent-seeking behaviour on the part of those who are authorised to regulate the movement of goods at the border.
The more efficient and active approach would be to go for a negative list by identifying a small number of items. It is not in Pakistan’s strategic interests or in conformity with its cultural norms to import from India. For instance, the import of liquor from India could be banned as it is from other countries of the world. All other items should be allowed, subject to the conditions that govern all international trade. Long negative lists give a great deal of authority to the customs regulators which invariably gets misused and, more often than not, turns into corruption.It is also not advisable to concentrate on the development of one point of entry such as the WagahAttari border.
There should be several crossings that should be encouraged to be developed. That will allow competition among the provinces which would produce with greater efficiency. It may also be economically more efficient to develop a port of entry closer to Karachi, still by far the most significant location for large scale industries. It would be cheaper for some of these enterprises to import machinery and intermediate inputs from India by road.
If the response to this initiative is quick and does not get bogged down in the bureaucracies on both sides or one side, it could begin to have a significant positive impact on the Pakistani side. I have argued on many occasions in this space that it is in Pakistan’s economic interests to build a strong trading relationship with India. No matter how sluggish is the Indian response to the initiatives Pakistan may take, Islamabad should keep on pressing for more openness from the Indian side.
The Indians remain more protective of their markets compared to their neighbours. They are also much more bureaucratic in the way they handle foreign trade. Even when they begin to bring down the tariff rates, they use all kinds of legal constraints to restrict trade. The Safta presents a mechanism where these problems can be tackled.
Trade experts argue that trade facilitation has become a much more potent tool for promoting international trade than the lowering of tariffs. Even in more protective markets such as those in South Asia, the walls of tariffs have come down significantly. Much more is to be gained by improving and simplifying non-tariff procedures for the movement of goods across frontiers.
In this context it is correct for the ECC to ask for the improvement of the facilities on both sides of the Wagah-Attari border. Complaints by countries against their trading partners should be preferably handled by the Safta secretariat rather than the trade authorities of individual countries. India has resisted the attempts to strengthen the SAFTA secretariat. It should be persuaded to change its position.
In conclusion, following points about the use of public policy by Pakistan in promoting trade with India needs to be underscored. It should use the framework made available by the Safta to deal with its much larger neighbour. That way it will be able to deflect the pressures that may come from India if the opening was to be done bilaterally. Within the Safta, Pakistan should be the leader rather than a follower.
It should, for instance, take the lead in forcing India not to use the anti-dumping clause as vigorously as it has done in the recent past. Since it is expensive for the exporting country to challenge the use of this clause, it is almost equivalent to an increase in the rate of tariff. Pakistan should also press other members of the Safta to abandon the positive lists in favour of the negative lists thus limiting the role of custom officials as regulators of the flow of trade. Increasing trade with India within the Safta framework should be an important part of Pakistan’s international trade policy.