The trade between India and Pakistan can go up to $37 billion from the current $2 billion if the two neighbours tear down artificial barriers like trust deficit and complicated and non-transparent non-tariff measures, according to a World Bank report.
Media reported that the report says that the current trade between the two countries is much below than full potential. It could only be harnessed if both countries agree to tear down artificial barriers.
The bank also estimated Pakistan's potential trade with South Asia at $39.7bn against the actual current trade of $5.1bn.
The report also unpacks four of the critical barriers to effective integration. The four areas are tariff and para-tariff barriers to trade, complicated and non-transparent non-tariff measures, disproportionately high cost of trade, and trust deficit.
Talking to a group of journalists on key points of the report at the World Bank office in Islamabad, lead economist and author of the document Sanjay Kathuria said it was his belief that trust promotes trade, and trade fosters trust, interdependency and constituencies for peace.
In this context, he added, the opening of the Kartarpur Corridor by governments of Pakistan and India would help minimise trust deficit. He said such steps will boost trust between the two countries. For realising the trade potential between Pakistan and India, he suggested the two countries can start with specific products facilitation in the first phase.
Kathuria said Pakistan had least air connectivity with South Asian countries, especially India. Pakistan has only six weekly flights each with India and Afghanistan, 10 each with Sri Lanka and Bangladesh and only one with Nepal, but no flight with the Maldives and Bhutan.
Compared to this, India has 147 weekly flights with Sri Lanka, followed by 67 with Bangladesh, 32 with the Maldives, 71 with Nepal, 22 with Afghanistan and 23 with Bhutan.
The report recommends ending sensitive lists and para tariffs to enable real progress on the South Asia Free Trade Agreement (SAFTA) and calls for a multi-pronged effort to remove non-tariff barriers, focusing on information flows, procedures, and infrastructure.
The report stated that Pakistan's decision of not granting Most Favoured Nation status or non-discriminatory market access to India was also a barrier to trade.
The preferential access granted by Pakistan on 82.1% of tariff lines under SAFTA was partially blocked in the case of India because Pakistan maintained a negative list comprising 1,209 items that could not be imported from India, the report noted.
Policy-makers may draw lessons from the India-Sri Lanka air service liberalisation experience. Connectivity is a key enabler for robust regional cooperation in South Asia. Kathuria said that reducing policy barriers, such as eliminating the restrictions on trade at the Wagah-Attari border, or aiming for seamless, electronic data interchange at border crossings, will be major steps towards reducing the very high costs of trade between Pakistan and India.
He argued that the costs of trade are much higher within South Asia compared to other regions. The average tariff in South Asia is more than double the world average. South Asian countries have greater trade barriers for imports from within the region than from the rest of the world.
He said these countries impose high para tariffs, which are extra fees or taxes on top of tariffs. More than one-third of the intraregional trade falls under sensitive lists, which are goods that are not offered concessional tariffs under
The World Bank Country Director for Pakistan, Illango Patchamuthu, said Pakistan is sitting on a huge trade potential that remains largely untapped. "A favorable trading regime that reduces the high costs and removes barriers can boost investment opportunities that are critically required for accelerating growth in the country," he said.
The World Bank's Director Macroeconomics, Trade and Investment Caroline Freund said Pakistan's frequent use of tariffs to curb imports or protect local firms increases the prices of hundreds of consumer goods, such as eggs, paper and bicycles.
They also raise the cost of production for firms, making it difficult for them to integrate in regional and global value chains, she said. Pakistan needs to promote export promotion policies to ensure sustainable growth.
On the issue of currency devaluation, she said undervalued currency is an anti-export measure. She suggests exchange rate should be determined by the real market trend.A lack of trade despite having a close proximity is contrary to the Gravity Model in economics, which assumes distance as a major factor in determining trading practices. In the model, distance is essentially used as a proxy for transportation cost. Furthermore, the greater the geographical distance, the greater the perceived change in cultural values and norms. A dissimilar culture often adversely affects the communication and trust between two trading partners, hence making it intricate for the establishment of a sound trading relationship. The model also takes into account the sizes of the respective economies, and the Gross Domestic Product (GDP) being directly proportional to the level of trade. However, the Indo-Pak trade scenario is a classic example one could use to demonstrate the model’s lack of applicability in today’s world.
Pakistan and India, despite boasting large quantities of nuclear arsenal, are still battling malnutrition, poverty and income inequality. To combat this, in theory, bilateral trade would augment the basket of goods and services available for people on both sides of the border, and would make the markets more competitive, resulting in a propitious trickle-down impact on prices.
Despite the current official cessation of commerce activities, trade is still taking place between India and Pakistan either illegally or via a third country. The latter, popularly known as circular trade, takes places through countries like Afghanistan. This is a testament to the fact that there are economically favourable opportunities available for the two nations, and business persons would be eager to indulge in cross-border trade if given the opportunity.
Inflows into Pakistan through these mediums comprise mainly of vegetables like tomatoes, medicines and pharmaceutical products, chemicals, textiles, tires, and machinery. On the flip side, the outgoing commodities include dry fruits, pulses, edible oil, footwear, clothing, and tobacco. Therefore, the liberalisation of trade policies between India and Pakistan could help formalise these trade channels and accord a stream of revenue for the respective governments in the form of custom duties.
From a Pakistani perspective, trade with India would help to draw in cheaper goods from across the border. To name a few such possibilities, Pakistan can substitute imported iron ore from Australia and Brazil with lesser priced Indian iron ore. Cheaper tea and coffee from India could also become available for Pakistan, which is instead currently being procured from Kenya because many multinational companies have established tea gardens there. Pakistan also has a sizable market for tires from India, especially those used for lorries. Due to the existing lack of trade along the Indo-Pak border, these tires are instead routed through Turkmenistan. This in turn leads to an escalation in the price. If variables such as transportation costs were lowered, and circular trade was abandoned altogether, it could lead to enormous trade benefits for both India and Pakistan.
The sharp fall of the Pakistani rupee against the American dollar has also negatively impacted Pakistan’s trade balance with the United States, especially when it comes to the importing of pharmaceutical products. Indian medicines could prove to be a much more economical alternative in this aspect, perhaps even to what pharmaceutical companies in Pakistan charge. Moreover, Pakistan is also facing frequent supply shocks in food items ranging from tomatoes to sugar, which in turn causes prices to skyrocket temporarily. In light of the regularity of these shortages, it has become imperative for the state to have a ready solution for such instances where supply disruptions can be dealt with immediately. Trade with India could provide a viable solution to help combat these supply-side shocks.
The benefits mentioned here only scratch the surface of what Pakistan and India could gain if they allow politics to take a back-seat and instead focus on furthering economic prosperity. Recent indications by the Pakistan government show that perhaps one can be optimistic about the resumption of trade ties with India. It is also safe to assume that improved trade relations could go a long way in helping to repair Pakistan and India’s political differences too. As the French economist Frédéric Bastiat said, “When goods do not cross borders, soldiers will.”