Wednesday, November 29

Why politics in trade is a bad deal



PM Modi has called a meeting on MFN status today. Business has always been hostage to India-Pak politics.

If it isn’t mere noora kushti — the popular expression in both India and Pakistan for scripted wrestling matches with predetermined outcomes — it would seem odd that New Delhi should threaten to withdraw the Most Favoured Nation (MFN) status it granted to Pakistan back in 1996 — might as well go the whole hog and block all trade?

But don’t rush to conclude that withdrawing MFN status will be a very potent — or even smart — pressure tactic.

Not only does such a step seem hasty and unbecoming of a G20 country which, along with China, contributes the most to global economic growth, it also doesn’t make much economic sense.

Pakistani imports are a minuscule 0.1% ($ 441 million in 2015-16) of India’s total imports. India’s exports to Pakistan, on the other hand, averaged $ 2 billion a year over the last three years (a little less than 1% of its total exports).

In other words, India enjoys a favourable trade balance with Pakistan, and has more to lose if trade is indeed blocked in the coming days, and less to gain by withdrawing MFN status.

Also, India is the largest country, in both territory and size of economy, in South Asia — its economy is bigger than that of all other South Asian countries put together. It is also the world’s fastest growing economy with ambitions of greater heft at the global high table — and for it to go against commitments made to the World Trade Organisation (WTO) makes for bad optics.

Article 1 of the General Agreement on Tariffs and Trade (GATT) that governs trade in goods requires every member to offer MFN status to all other members — contrary to what the expression “most favoured” conveys, MFN status actually requires a member to not discriminate among other members, and to treat all other WTO members equally in terms of tariff imposed on goods.


The fact is that India-Pakistan bilateral trade has never really blossomed over the past many decades. In January 2004, in the final phase of Prime Minister Atal Bihari Vajpayee’s government, the South Asian Free Trade Area (SAFTA) agreement was signed during the 12th Saarc Summit in Islamabad. In the decade from then to 2014, the value of the bilateral trade crawled from $ 600 million (in 2004) to $ 2.7 billion — less than 0.5% of India’s total trade. Had Pakistan been more enthusiastic, these numbers could have been of a different order.

From what businessmen on both sides estimate the value of the informal trade on the circuitous Mumbai-Dubai-Karachi route — between $ 500 million and $ 5 billion — it would seem bilateral trade could potentially be 10 times its current value, or upwards of $ 20 billion.

To achieve this, of course, a lot more must be done — crucially, a dramatic improvement in all-round connectivity. More land routes, more flights to carry cargo, and better Customs harmonisation will help significantly.

Businessmen on both sides benefit if multiple direct trade routes are established and trade ties normalise. Their voices are, however, often muted at times when the countries go through rough patches in their relationship. So, if in 2011-12, upbeat Indian industrialists claimed bilateral trade prospects looked “extraordinary”, they are now ready to snap ties and swear it won’t hurt India’s interests. To be sure, the narrative isn’t any different on the other side either.

And yet, the two countries have made great progress in normalising trade relations over the last five years. There was much bonhomie in February 2012 when Minister for Commerce and Industry Anand Sharma travelled to Lahore through the Wagah border.

There were rousing cries by Indian and Pakistani businesspersons in Lahore, Karachi and Islamabad to allow trade ties to iron out political differences.

More business enlarges the scope of people-to-people contact and creates jobs on both sides, bringing peace dividends to the political process. Pakistan committed itself to operationalising MFN status to India in 2012 by opening up trade, barring a short ‘negative list’ of items that India would not be allowed to export.

In fact, it was the overwhelming sentiment of businesses on both sides that seemed to have pushed the two governments into clinching a deal.

Notwithstanding the fact that India still awaits the MFN status, Islamabad’s shift to a negative list of items from a positive list, which too will be phased out over time, is remarkable in itself. India also extended preferential tariff to a large number of items of export interest to Pakistan.

After almost-frozen trade ties for decades, this was no mean achievement. Prime Minister Narendra Modi’s May 2014 invitation to Saarc leaders for his swearing-in promised to bring more vigour within Saarc, and also add fresh momentum to India-Pakistan ties — a little over two years later, however, Pakistan-based terrorism has changed things enough for India to threaten to review the 56-year old Indus Waters Treaty and withdraw the 20-year old MFN status, and decide not to attend the 19th Saarc Summit.

Senior BJP leader Yashwant Sinha wrote in The Indian Express last week that “While the military response [to Uri] is being worked out, the government should take two steps immediately: It should abrogate the Indus Waters Treaty (IWT)… with immediate effect and withdraw the Most Favoured Nation treatment it has granted to Pakistan”

Not so long ago, in February 2016, delivering the keynote address at an Icrier-organised seminar on ‘Enhancing India-Pakistan Trade’, Sinha had lamented that trade and economic relations between the two countries had been a victim of politics.

“Unless we delink it from politics, we cannot expect any dramatic changes or improvements,” he had said, going on to make a fervent plea to create durable pressure groups at a non-official level to ensure that economic relations are delinked from politics. “Trade can be that balm that will cement relations between the two countries,” he said.

Of course, we live in different times, and perhaps to Sinha’s discomfort, we are once again letting trade be held hostage to politics.