The year 2014 will be crucial as the US withdraws its troops
from Afghanistan. At the same time, India-Pakistan rivalry there has the
potential to intensify and undermine any fragile stability that may
exist. In this situation, trade could be a mechanism for mitigating
tension between the two countries.

If trade relations are normalised, Pakistan will get access to a
market of over 1.2 billion consumers and India will have access to a
market of over 180 million people. The increased economic activity will
lead to more employment opportunities and higher stakes for people on
both sides in maintaining peaceful ties.

According to studies, South Asia remains one of the least integrated
regions in the world. Pakistan and India account for almost 92% of South
Asia’s GDP, 85% of the region’s population and 80% of its surface area.
Despite that, trade between the two constitutes only 20% of regional
trade.

Pakistan has the largest export potential in textiles, jewellery,
precious metals and base metals, accounting for 45% while India can
augment its exports to Pakistan in three categories – machinery,
mechanical appliances and electrical equipment. These three categories
comprise 54% of India’s export potential. Therefore, it is clearly in
the interest of both countries to find a political solution to their
dispute.

In the current scenario, the entire globe is focused on the Middle
East and Asia with the primary concern of protecting economic interests
in the form of smooth flow of oil from the Persian Gulf region as well
as tapping natural resources of the Central Asian Republics.

At this critical juncture, due to its strategic geographical
position, Afghanistan has the potential to become a land-linked country
providing both Pakistan and India with direct routes to the Central
Asian region.

India should allow Pakistan to access Nepal, Bangladesh and Bhutan
via its territory and Pakistan should give transit rights to India to
access Afghanistan. This significantly impacts the trade potential, even
with other neighbours.

Trade Restrictions

In the face of restrictive trade policies and transport bottlenecks,
at present, a great deal of trade occurs via Dubai. The composition of
informal trade between the two countries shows that a range of products
are avoiding official tariff and non-tariff barriers to reach the third
country, reflecting the potential for expanding official trade.

According to recent data of the World Bank, low transport costs,
dismantling of tariff and non-tariff barriers, grant of MFN status to
India by Pakistan and improvement of logistics arrangements can help
increase the volume of bilateral trade to approximately $8-10 billion
annually.

Current low volumes of trade and low trade integration in Pakistan
and India have their roots in their respective systems. Both have
relatively restrictive trade regulations. Numerous studies have
demonstrated that the relaxation of constraints would benefit both
countries.

The recent agreements between Minister of Commerce and Textile
Khurram Dastgir Khan and his Indian counterpart Anand Sharma can play
the role of a catalyst in harnessing the benefits of bilateral trade in
the post-2014 scenario.

Trade will, of course, not solve all the glitches, but it could be an
important catalytic agent in lowering the tensions. The reduced
tensions – an inevitable benefit of strengthened economic ties – would
improve the security climate for investment and economic development not
only in Pakistan and India but also in the whole South Asian region.