Abid Qaiyum Suleri
suleri@sdpi.org
The hopes from SAFTA (South Asia Free Trade Agreement) were never too high as far as 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 in February 2007, when Pakistan complained that India had decided to withdraw tariff concessions extended to Pakistan under the Agreement. India was quick to deny the accusation and blamed Pakistan for not implementing SAFTA in letter and spirit. Although things did not get any worse, the question was raised 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: this would have given Pakistan a bad name. The second option was to ratify SAFTA and initiate trade on a negative list (i.e., a list of “non tradable” items) basis. This would have practically provided 'Most Favoured Nation' (MFN) status to India, as trade in items not part of negative list would have been liberalized. The third alternative for Pakistan was to deal with SAFTA and an ‘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' (i.e. a list of tradable items).
Pakistan decided to link free trade with India to 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 trade with India would not be in favour of Pakistan as the latter's trade balance with India was already negative.
India had given MFN status to Pakistan in 1996. However, Pakistan complains about the excessive use of non-tariff trade barriers (NTBs) by Indian counterparts and argues that reduction in tariffs through MFN status is meaningless while the NTBs prevail. Here it should be kept in mind that Indian NTBs are not Pakistan-specific only. Even the office of the United States Trade Representative (USTR), in its recent review of Indian trade policy, has identified many NTBs.
India, 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 1,000 items) instead of a negative list as per the SAFTA agreement. India is also demanding a reciprocal “Most Favored Nation treatment”.
Human beings tend to not follow a win-win paradigm; most of the time they tend to follow win-lose paradigm (my victory should be at the cost of someone's loss). However, India-Pakistan trade relations present a lose-lose paradigm: if I cannot win then you will not win either. The ‘lose-lose’ paradigm followed by policy makers on both side of the border is clearly evident in a study conducted by The State Bank of Pakistan (SBP) in 2005. The study, titled 'Implications of liberalising trade and investment with India', calls for the liberalisation of trade with India which, it believes, would benefit both 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-India trade were to open up, bilateral trade volume could cross US$ 5.2 billion. The study also reveals that both countries had achieved only two per cent of their total bilateral trade potential during the past 25 years.
According to the report, 32 per cent of Pakistan's export products are currently bought by India from other countries and constitute one third of India’s total imports. The report notes that 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.
The report indicates that about 70.3 per cent of the common items exported from Pakistan have unit values less than or equal to Indian imports' unit values, and there is a large scope for the export of those items simply by producing the quality required by India.
The SBP study also shows that India currently earns US$ 15 billion in export revenue from 2,646 items being imported by Pakistan from other countries and notes that in 2004 the unit value for Pakistan's imports was higher than the unit value of Indian exports for 48.7 per cent of these items. Forty five per cent of those common imports were not included in the Pakistan positive list and hence their import from India was not allowed. Pakistan was losing US$400 million to 900 million dollars by importing those items from other sources.
Some of the recommendations of SBP report do make sense. However, Pakistan would have to open up its trade with India in order to test the validity of the SBP's hypothesis. This is a difficult task, especially keeping in view Pakistan’s record trade deficit which is predicted to exceed US$ 12 billion by the end of the current financial year.
In my opinion Pakistan will 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 (either for Pakistan or for the rest of the world). 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 does not feel any dependency on SAFTA: as a recent World Bank study indicates, in 2004, the total combined imports of goods and services of the four largest countries in South Asia other than India (i.e., Pakistan, Bangladesh, Nepal, and Sri Lanka) were US$ 48,978 million, while Indian exports were US$ 115,233 million. Even if all of India’s South Asian neighbors decided to import goods from India only, the country still needs to export US$66,255 million worth of goods and services outside SAFTA.
We have already observed that in case of a deadlock in the multilateral trading regime (WTO) things start moving towards bilateral trading regimes 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. Both Pakistan and India are trying to sign FTAs with their South Asian neighbours. Both Pakistan and India have already signed separate FTAs with Sri Lanka and efforts are being made to do the same with Bangladesh.
India is a major partner in the Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC). BIMSTEC consists of Bangladesh, India, Myanmar, Sri Lanka and Thailand. This sub-regional group has already signed a framework Free Trade Agreement and is aiming to transform into a free-trade agreement in the long run. Nepal is also receiving a preferential trading arrangement with India. China is about to join BIMSTEC as an observer. This leaves Pakistan out, as it is not part of BIMSTEC and would be unable to join BIMSTEC without a green signal from India so basically Pakistan would lose its regional market.
Two important questions remain: What is the fate of SAFTA? And why should Pakistani and Indian consumers pay premium prices for commodities they get through informal trade or through third countries like Dubai or Singapore?
Looking at the 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 cement and can import these from Pakistan. However, committed political will from the top and a strong push from the bottom are required if the status quo is to be changed.
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 the common person and to visualise a new South Asia free from hunger and poverty.
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