Trade with Pakistan – An Unlikely Game-Changer

By all accounts, the misplaced optimism of Prime Minister Manmohan Singh on normalising relations with Pakistan appears to be rubbing off on some of his cabinet colleagues as well. The latest Indian cabinet minister to suffer from this affliction is Commerce Minister Anand Sharma. Waxing eloquent about how trade and economic relations is the only option left for the two countries to normalise relations and how they needed to move fast to make up for lost time, Mr Sharma has not only gone out on a limb for normalising trade with Pakistan, but has also thrown caution to the winds to achieve this objective.1

Despite having been cautioned, Mr Sharma in Mid February embarked on his Pakistan yatra to push ahead with the trade normalisation process, only to face the mortification of the Pakistan cabinet refusing to endorse the shift from a ‘positive’ list to a ‘negative’ list of items that can be traded between the two countries. 2 Having realised the diplomatic embarrassment caused by this decision, the Pakistanis assured Mr Sharma that by the end of February, the promised transition to a ‘negative’ list would be completed. 3 But while this commitment was fulfilled on the last day of February, the ‘negative’ list ballooned from around 640 items to just over 1200 items. 4 Still, the decision to move to a ‘negative’ list means that the two countries can now trade in around 6000 items, up from the earlier 2000 odd items allowed for trade. Pakistan has also promised that the ‘negative’ list will be scrapped by the end of the current year, which would effectively mean that India had been granted MFN status. Assuming this timeline is met, and the trade regime governing commercial ties between the two countries is based on rules and not whims and prejudice, there will remain a big question mark over whether or not it will prove to be the game-changer in bilateral relations as it is being touted.

That trade between two neighbouring countries is generally mutually beneficial is a no brainer. To this extent, any move in the direction of normalisation of trade relations is to be welcomed. But it is important to understand that trade is to be celebrated only for its intrinsic worth as a creator of wealth and not because it helps in resolution of disputes or because it serves as a panacea for all the other problems between two countries. In other words, if the idea of normalising trade is anything other than the benefit it could bring to the businesses, consumers and by extension, economies, of the two countries – for instance, promote people-to-people contacts, create vested interests in peace, develop stakeholders and pro-peace lobbies in either country etc. – then it is tantamount to doing the right thing under wrong notions.

Historical experience at least doesn't bear out the theory that a robust trading relationship between countries also helps in the improvement of relations between them. To say that “people don’t like killing people they do business with” is a nice slogan but far from being a truism. 5 In fact the author of this slogan contradicts this seemingly profound observation a sentence later in his article by mentioning that India and Pakistan had a free trade regime until the 1965 war disrupted trade relations! Not to belabour the point too much, if India and Pakistan were doing business with each other then how come they entered into a war and started killing each other in 1965? Again, the theory of developing stakes and vested interests is all very well but the history of nations and peoples is replete with examples of how people who did business with each other ended up murdering, or worse massacring each other – Germany and Britain before and during the First World War, the genocide of Jews by the Nazis, and most appropriately, the Partition massacres despite the fact that Hindus and Muslims shared a symbiotic economic relationship.

Doubts about the utility of trade in improving relations between India and Pakistan also abound because notwithstanding claims by the Pakistani authorities that all ‘stakeholders’ (read Pakistan army) are in agreement on the decision to normalise trade relations with India, there is little on ground to suggest that the Pakistani military and intelligence establishment has made the strategic shift of shedding its inimical and hostile, even hate-filled, attitude towards India. When influential Pakistanis who are known for their closeness to the Pakistani military establishment are questioned over the mixed signals being received in India – on the one hand, movement towards MFN status and on the other hand, giving a free hand to the most vituperative anti-India rabble rousing by the jihadist terror groups organised under the umbrella of Difa-e-Pakistan Council – the answer is very simply that this sort of a thing will keep happening. Add to this the statement of the Pakistan army chief Gen Ashfaq Kayani who declared last year that Pakistan was an Islamic and ideological country whose foundations – presumably alluding to Partition and the pernicious Two-Nation Theory – are based on the bloods of lakhs of martyrs and will therefore not compromise its honour and dignity for prosperity. 6 In the face of such compelling facts, for anyone to think that trade will prove to be a magic bullet is to live in a world of make-believe.

Clearly, the Pakistani establishment would like to follow a parallel track approach of trade and terror – the former allows it to reap economic benefits and the latter allows it to keep its leverage over India intact. But since such an approach is unlikely to be acceptable to India and the next big terror act could easily derail the trade normalisation process, Pakistan will have to decide one way or another between trade and terror because the two cannot go together. The reason for this is simple. Deepening and widening of business relations between the two countries will necessarily mean liberalizing the visa regime to make travel easy. Alongside, banking arrangements to facilitate trade and possibly investment will have to become operational. But both these issues are going to set alarm bells ringing in the security establishment of India because of their misuse to spread, sponsor and support terrorism in India.

Until recently, the argument most offered in support of liberal visa regime was that terrorists don’t apply for visas. But this conventional wisdom has been turned on its head with the busting of a terror module that was planning to plant bombs in Delhi on the eve of Holi festival. For terrorists to walk in under the guise of businessmen and traders is the easiest and most cost effective thing to do. All it takes is a Rs 15 visa fee and a train ticket costing a couple of hundred Rupees. No expensive transiting through Nepal or Bangladesh and no undertaking the hazards of crossing the LoC in Jammu and Kashmir. Similarly, there are serious concerns over the opening of Pakistani bank branches in India, more so given the fact that some of the top banks of Pakistan are suspected of functioning as funding agencies of the ISI. Worse, they have been found involved in transferring money to terror groups and facilitating Hawala trade. 7

Quite simply, until and unless Pakistan renounces terror in all its forms and manifestations, eschews the use of terror as an instrument of state policy and stops making the specious and self-serving, if also warped, distinction between terrorists and so-called freedom fighters, trade relations will not make much difference. Even though the two countries might continue to trade, and volume of trade might even go up, security concerns will continue to prevent trade, travel and investment flows from reaching the levels where they might actually play the role of a game-changer. In other words, more than a changed Pakistani policy on trade with India, it is a changed Pakistani policy on terrorism that will be a real game changer in Indo-Pak relations. But this is easier said than done because it involves a transformation in the very character of the Pakistani state, any by extension of the Pakistani society and polity, from Islamofascism to a more modern, progressive and tolerant ideological underpinning. Basically, this means that until the basic DNA of Pakistan mutates from being intrinsically hostile towards India into something more friendly and tolerant, normalisation of relations will remain something of a pipedream.

Even from a purely economic angle, there appears to be a lot of mythologizing, and perhaps misperceptions about the potential benefits that trade normalisation will bring. While there is a lot of talk about raising the volume of trade from around $ 2 billion currently to around $ 10 billion in a couple of years and about the new markets that will become available to the businesses of the two countries, these propositions need to be taken with a pinch of salt. How much trade is done will depend on only on how profitable the businessmen of the two countries find trading with each other. If they find it profitable, then it is entirely possible that the two way trade could breach the $ 10 billion mark much earlier than expected. On the other hand, it is also possible that as trade opens up, businesses could find that it only brings marginal benefits and the neighbour is not quite the Eldorado that it was bandied as being.

The size of markets in the two countries is also notional and while they might turn out to be larger than is being currently estimated, they could just well turn out to be much smaller than imagined. A lot will depend on a) capacity and capability of businesses to break into and supply the new market, (b) the ease of transactions in terms of payment mechanism, dispute resolution, efficiency of supply chains etc., (c) hurdles created by bureaucratic and prejudicial biases, and most of all (d) consumers might just not be impressed by the goods being offered. Despite these pitfalls and unknowns, Pakistan is opening trade with India not so much because it has changed its inimical policy towards India, but more because doing business with India is one of the critical requirements for Pakistanis economic survival. At a time when the Pakistani economy has practically run aground, it can no longer afford the old policy of blocking trade with India. With globalisation, competition, and most of all global recession, margins of businesses have got squeezed and the luxury of incurring additional expenditure in buying raw materials and machinery from say Brazil when it is available at far cheaper rates from India is now a recipe for bankruptcy, something that the Pakistani businesses are realising to their cost. Any additional expense, whether in terms of prices, freight or market access effectively makes domestic industry uncompetitive and hence unviable. By opening trade with India, this is the first advantage that Pakistan will gain. Secondly, by importing foodstuffs, and essential agricultural produce from next door India to make up for shortages, the government of Pakistan can moderate any price rise and thereby not only protect the Pakistani consumer but also gain politically. The alternative is to source the same goods from faraway places – for instance buy sugar from Brazil – which will only add to the cost. Third, Pakistan can gain by importing things like diesel fuel which it currently sources from Kuwait. The same fuels can be supplied at cheaper rates by Indian refineries in next door Bhatinda and Jamnagar. Fourth, many Pakistanis producers – in particular the cement industry – become viable if the Indian market opens up for them. Pakistani cement companies are operating below the economic threshold because of poor demand domestically and they can achieve full capacity utilisation if they can enter into the Indian market. Finally, normalised trade relations will open the door for Indian investment to flow into Pakistan. At a time when the rest of the world is scared of investing in Pakistan, Indian businesses are rather bullish on entering the Pakistani market. The jobs that this investment will create is something Pakistan can no longer afford to scoff at. The only problem is that when Indian companies make big investments in Pakistan, there is a real danger of their becoming susceptible to ISI machinations and this is something that the Indian government will need to watch very closely.

While the benefits of opening trade with India are apparent, there is at the same time a lot of misunderstanding of these benefits. Although there is no doubt that the Pakistani consumer and manufacturer will gain from good quality and reasonably priced Indian goods, commodities, engineering products and raw materials like iron-ore, coal etc., the impact of regularising trade on the revenues of the Pakistani state is probably being over-stated. No doubt, a lot of trade between the two countries is currently being conducted through third-parties, i.e. through Dubai, Colombo or Singapore, and by regularising trade, this will no longer be necessary, thereby bringing benefits in terms of lower prices. While prices will reduce because of lower freight costs and reduction in the transaction costs and risks involved in organising third-party trade, its impact on custom duty collections will be revenue neutral. After all, it is clearly a misnomer to label third-party trade smuggling because surely Pakistan levies a custom duty on imports from any of the third countries from which Indian goods are routed and the same duty structure will now be levied on direct imports from India. The revenues of the Pakistani state could in fact fall slightly if the volume of trade remains the same because of the preferential tariffs under the SAFTA regime that will govern Indo-Pak trade. Only if the trade volume rises, will the Pakistani state able to collect greater revenues. But then this will depend on the decisions that the Pakistani state takes on the issue of terrorism.

While trade is to be welcomed for the economic benefits that come with it, at a political level trade also create its own malcontents and discontents, more so in countries that still see trade with a mercantilist mindset and haven’t quite adjusted to the new norms and standards of trading in a globalised environment. Therefore, sooner or later issues like the need to balance trade – something that fits in well with the Pakistani quest for ‘parity’ with India – will crop up between the two countries. There will also be charges of dumping and predatory trade practices that will fly about. And given the Pakistani genius for spinning and subscribing to conspiracy theories, it is inevitable that conspiracy theories of how India is using commerce to corrupt, co-opt and countermine Pakistan nationhood will start doing the rounds, creating their own pressures on the Pakistani state and giving a handle to the unreconstructed India-baiters and India-haters in Pakistan to question the opening of trade with India.

While the new initiatives to normalise trade between India and Pakistan need to be welcomed, it is probably very early to start singing hosannas about it. Trade will never be able to build bridges if export of terror doesn't stop. And terror will cease only if the Pakistani state transforms itself. What are the chances of this happening?


  1. Economic ties only way forward, says Indian commerce minister – The News International 17/2/2012
  5. “Redefining national interest” by Mohammed Malick – The News International 2/3/2012
  6. Prosperity is aim but not at the cost of honour: Kayani – The News International 1/5/2011

Published Date : 11th March, 2012

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