Threat to quit Safta
By Shahid Javed Burki


THERE are some troubling indications that Islamabad may be contemplating pulling out of the South Asia Free Trade Area (Safta). That would be very unfortunate from Pakistan’s perspective. It would do little damage to India, but it would be a highly imprudent use of economic policy in an area in which Pakistan has little leverage.

While most countries that are members of the South Asian Association for Regional Cooperation (Saarc), have ratified the Safta treaty, Pakistan is reluctant to follow, arguing that ratification would involve granting the “most favoured nation” (MFN) status to India. This, as I will argue in this article, is a wrong approach. Neither pulling out of Safta nor continuing to deny India the MFN status would help Islamabad achieve the objectives it seeks. Let me first deal with the MFN issue.

According to the rules of the World Trade Organization (WTO) and obligation of membership in that organization, all member states must give the MFN status to each other. The failure to comply can lead to a complaint by a state that has not been given the status by another member. In response to a reference by the aggrieved party, the WTO can impose sanctions on the offending member.

The principle of the MFN — that the same treatment has to be granted to all members of the organization and that no member can be discriminated against — is one of the pillars on which the WTO was built and on which it stands. The WTO came into being in 1995 following the conclusion of the Uruguay round of negotiations and the signing of the Marrakesh treaty. Both India and Pakistan were original signatories. Pakistan, in other words, is obliged to give the MFN status to India as it has given it to all other countries that are WTO members.

India, observing the rules of membership, gave the MFN status to all the countries it traded with; Pakistan refused to reciprocate and kept India out of its list. Several arguments have been put forward since that decision was taken as to why Pakistan was not ready to comply. Some of them are political and some economic. It is said that the term “most favoured nation” does not translate well into Urdu and that the grant of the status to India by Pakistan would lead to headlines in the Urdu press that would not be comfortable for Islamabad. The headlines would proclaim that Pakistan has declared India to be its most pasandeeda mulk, a description that would not sit well with some anti-India elements in the society.

Some years ago, Washington had the same problem with reference to China. Since China at that time was not a member of the WTO, the grant of the MFN status to it from the United States could only be done by legislative action. The US Congress had to pass a bill every year to authorize the grant of the MFN status to China. Every time it was done, China-bashers in America accused the administration in Washington of insensitivity to China’s alleged abysmal record in areas such as human rights, environmental protection, treatment of minorities, etc. The MFN question, in other words, became an important lever in the hands of Washington in conducting its relations with Beijing.

Washington handled this recurrent problem by dropping the “most favoured nation” term from its legislative lexicon altogether. The term was replaced with the less emotive “normal trading relations” and the strategy worked. Pakistan could perhaps take a leaf out of Washington’s diplomatic playbook and designate its relations as being “normal” with India rather than be subject to conditions and barriers that do not have the sanction of the WTO.

Besides, as matters now stand, trade with Pakistan is of little consequence for India. Pakistan does not have any leverage over India in terms of the markets that India covets or the markets in India that would be starved if Pakistan blocked the supply of its goods to them. Trade is a poor and ineffective leverage to use for Pakistan in its relations with India. That is also not the case with India, which is the reason why the two countries do so little trade.

Politics is not the only reason why Pakistan continues to stall the normalization of trade relations with India so that they meet the obligation of membership in the WTO. Islamabad claims — and in this respect it has a fair amount of evidence on its side — that even after granting Pakistan the MFN status, India has continued to discriminate against its neighbour by putting in place all kinds of non-tariff barriers. These cover a wide front. Merchandise entering India from Pakistan has to meet certain standards which are prescribed by Indian laboratories, and these are located at some considerable distance from the Pakistani border. Pakistani exporters have to incur fairly large expense to meet these requirements. This condition serves as a quasi tax on imports from Pakistan.

Another popular form of non-tariff barrier is the category of sanitary and phyto-sanitary (SPS) regulations that pertain to agricultural products. The SPS is a common non-tariff barrier used by most countries that wish to protect their agriculture sector. India is no different in that respect and it has applied this type of trade restricting measure in its trade with all neighbours. Both Bangladesh and Nepal are very resentful of the way New Delhi has been using SPS to constrain imports from these two countries, particularly of perishable commodities.

India has also become an enthusiastic user of anti-dumping measures to limit imports. These measures are allowed under the WTO; the problem with them is that they impose great administrative burden and expense on the countries that are subjected to them. The main problem with the way anti-dumping provisions work is that the burden of providing proof that the sanction applied is wrongly used rests on the shoulders of the country against which they are being used. It is not surprising that large countries that have the bureaucratic and legal infrastructure to sustain anti-dumping remedies are its most frequent users. The countries that are adversely affected are those that do not have the administrative, legal and financial means to challenge these activities.

And India has also used the grant of transit rights as a way of throwing its weight around in trade matters in the region in which it is an economic and military colossus. It plays with transit rights if it wishes to discourage the export of some goods that would gain market share in third countries on the part of some of its small neighbours. India has been known to direct the Nepalese traders to use the ports most distant from the places where goods are manufactured. It is also not willing to grant Nepal access by road for some of its products that have a market in Pakistan. It is much cheaper for the Nepalese and Pakistani traders to use road for trade rather than go through a combination of road and ocean transport. In other words, India has successfully used its control over transit routes in intra-regional trade to achieve its narrow economic objectives.

However, by holding back on MFN status Pakistan has not been able to strengthen its position with respect to India. It has not acquired a weapon whose use would prompt the right economic behaviour from India. The same applies to membership in Saarc and ultimately in Safta. By threatening to quit Safta, Pakistan, instead of weakening the Indian hand, would only strengthen it. This is particularly the case if Pakistan wishes to produce forward movement on India’s part in resolving the long-festering problem of Kashmir. Safta should not — and must not — be used as a lever by Islamabad over Kashmir.

One of the long-term Indian goals has been to isolate Pakistan in the region that encompasses both countries as well as in the region in which Pakistan has a more significant presence than India. Ever since the idea of a regional cooperation mechanism was floated by Bangladesh, which eventually led to the creation of Saarc, India has been reluctant to give much authority to the organization. Delhi has deliberately kept the Saarc secretariat, located in Kathmandu, weak. The secretariat cannot undertake any independent work unless it has the sanction of the capitals of the entire membership. This is one way of giving India a veto over all actions by the secretariat.

Delhi is the most difficult capital to please for the Saarc bureaucracy; it has even blocked the flow of grants from institutions such as the World Bank, the Asian Development Bank, and the British Department for International Development to allow the secretariat to do independent analytical work. One reason why the Saarc has remained weak is that India wishes it to be that way.

While participating in Safta, Delhi is simultaneously — but more aggressively — promoting another regional grouping, the BIMSTEC. This organization has all countries of the Saarc minus the Maldives and Pakistan as its members. In addition, it includes Myanmar and Thailand. The BIMSTEC is following a more aggressive timeline than Safta. If it is established before Safta the latter would become largely meaningless.

Indian trade diplomacy is engaged in other ways to isolate Pakistan. It has so far been successful in keeping Pakistan from associating with the Asean. India also managed to exclude Pakistan from the recently established forum of large Asian and African countries that has the ambition to create a large trans-continental free trade area.

With this as the background, it is mind-boggling why Pakistan would contemplate walking out of Safta. Such a step would not get India to move on Kashmir — the ostensible reason for such a move. It would only further isolate Pakistan in the South Asian region at a time when India is gaining more strength every day. Instead of leaving Safta, Pakistan should work hard to strengthen the organization.

In that context, it is useful if the Pakistani authorities spent some time studying the experience of other successful regional trading organizations, in particular those which had one relatively large economy in the centre surrounded by smaller ones. The European Union is a classic case of an economic and trade organization that was able to constrain the region’s largest economy, Germany, and force it to play by rules that were acceptable to all member states. The same is true for Mercosur in which Brazil, the organization’s largest economy and the region’s most powerful country, has been bound to good political economic behaviour by a system of rules. The small countries in southern Africa are working hard to create a similar organization in which South Africa will be embedded.

If India works at times to the disadvantage of its neighbours by using non-tariff barriers to constrain trade, or harasses them by anti-dumping measures, or uses transition restriction to achieve narrow national interests, an organization such as Safta would be an ideal forum within which to correct such errant behaviour.

Pakistan is South Asia’s second largest economy and it is incumbent upon it to play a role that would encourage all member countries to work for the common good rather than promote narrow national interests. Quitting Safta and not playing that role would be a mindless policy to follow.