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Beggar-Thy-Neighbor: The Effects of Revoking Pakistan’s MFN Status

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Beggar-Thy-Neighbor: The Effects of Revoking Pakistan’s MFN Status

Trade is always a first casualty.

Beggar-Thy-Neighbor: The Effects of Revoking Pakistan’s MFN Status
Credit: Wikimedia Commons/ Tore Urnes

Trade has been a crucial driver for the growth and development of many countries. With an increase in trade and trade-related activities the world has become increasingly integrated and multipolar. The large and expanding economies of developing countries dictate their policymakers to expand their bilateral trade relationships and penetrate markets offering comparative advantages and similarities in demand structures. Over a period of time, rising South-South trade has been viewed positively and as a sign that developing countries could provide a significant impetus in the growth of each other.

India and Pakistan, being two populous and large economies and sharing a larger and more accessible common border, also offer some of the biggest gains from trade in the entire South Asian region. However, recent events in Kashmir followed by India’s decision to revoke Pakistan’s non-discriminatory “most favored nation” (MFN) status and increase custom and tariff duties by 200 percent will significantly dent Pakistan’s economy and worsen its economic problems.

But what does it mean to revoke MFN status and how it will impact India-Pakistan trade relations? Is it more a symbolic gesture, egged on by opportunistic politics or will it actually serve any mercantilist economic doctrine of “beggaring thy neighbor” for India?

Structure of Trade

While both countries are dominant members of the South Asian Association for Regional Cooperation (SAARC) and have the potential for great bilateral trade, official bilateral trade remains very low and neither country falls among the top 30 trading partners of the other. Official trade between the two countries remains negligible compared to their respective global trade volumes. This is partly due to three main reasons:  the history of relatively closed economies of both countries, political frictions that have influenced mutual trade relations, and the operational channels of informal trade and trade through third countries. The final point is perhaps most important as informal trade between the two countries has been going on for a long time and doesn’t get reflected in official trade figures. 

Trade through informal channels takes place on porous borders as well as through misuse of green channel facilities at international airports and railway stations. It is also taking place via Afghanistan where goods are exported officially from India to Afghanistan and later smuggled into Pakistan through Peshawar, which lies close to the Pakistan-Afghan border. Trade through third countries or circular trade (technically official trade) is mainly conducted through agents operating in free ports like Dubai or Singapore. Circular trade is also taking place through the Central Asian republics.

Trade between Pakistan and India via Dubai has the advantage that consignments are not scrutinized as much as those coming directly from either country. Based on an extensive survey conducted in India and Dubai, Taneja and Bimal in 2016 estimated informal trade to be $4.71 billion between the two countries. Of that, India’s exports to Pakistan were estimated to be $3.99 billion and imports from Pakistan at $0.72 billion. Similarly, the Sustainable Policy and Development Institute (SPDI), Islamabad, estimated informal trade between Pakistan and India at $545 million in 2005. However, the actual volume of informal trade is unknown and could be larger given that it’s operating from many other countries as well.

Traders usually resort to informal trading because of high tariff barriers and transportation costs which make it cost-effective to smuggle goods through informal routes. Restrictions on some goods due to health and religious beliefs and imposition of some non-tariff barriers are other reasons to carry out informal or proxy trade. Though India has no restrictions in terms of imports or exports from Pakistan after signing SAFTA agreement however some non-tariff barriers are still being used to limit access of some Pakistani imports in the Indian market.

Given this background, it is imperative to examine if revoking MFN status will really affect Pakistan’s trade balance and overall legal feasibility of India’s MFN obligation towards other countries as per WTO rules.

Official Trade

The South Asian Free Trade Agreement (FTA) which came into existence in January 2006 provided a framework for removing some obstacles to trade, particularly removing the positive and negative list for products. But the FTA’s implementation did not dramatically improve economic integration between the two countries. Both countries maintained very restrictive trade regime, barriers related to transportation, banking, issuing of visas, payment mechanism and other non-tariff barriers due to which insignificant progress has been made on the level of total trade volume between two countries. 

The official trade between the two countries stood at $2.4 billion in the last fiscal year, recording a growth of 6 percent  as compared to the 2016-17 fiscal year. This increase was observed after a decrease of 12.8 percent from the previous fiscal year. That decrease could be traced to the Uri attack in 2016 and other political development in India-Pakistan relations. Meanwhile, the percentage share of Pakistani imports remained abysmally low as low as of 0.10 percent of India’s total imports, which stood at $488.56 million in the last fiscal year (Export Import Data Bank, GOI). Thus, imposing a custom duty of 200 percent and the impact of the non-MFN member status is hardly going to affect Pakistani domestic industries as it could easily divert it other high demand markets. Therefore it could be seen as sheer pressure tactics and rhetoric to be used for political gains in the upcoming elections.

Overcoming Mistrust Through Trade

Trade always becomes a first casualty in a hostile environment and volatile political relations between any two countries. Despite being the two largest economies in South Asia, India and Pakistan have enjoyed very little trading relations in the last seven decades. A historical review shows that at the time of independence, India and Pakistan were heavily dependent on each other. In fact, India’s share in Pakistan’s global exports and imports accounted for 23.6 percent and 50.6 percent respectively in 1948-49 which declined to 1.3 percent and 0.06 percent respectively in 1975-76. Political relations between India and Pakistan have remained discordant and contentious over a long period of time. A trust deficit does not allow for stability, which is a prerequisite in order for a trade to take place.

More trade between the two countries will help sustain the peace process. In these current volatile relations, intra-Kashmir trade offers a new opportunity for enhanced economic interdependence and for chances of greater interaction among masses living on both sides. Discussions on intra-Kashmir trade must acknowledge that it is nested within the broader India-Pakistan bilateral trade relationship and not just a confidence-building measure. The economic costs of the Kashmir conflict are enormously high for both the countries and trade can only contribute to building regional peace.

Ubaid Mushtaq is a researcher with National Institute of Advanced Studies, Bangalore, India. Views expressed are strictly personal