You Trade with Friends Not Enemies

Pakistan’s number one friend China has long ago marked a significant footstep for its bosom friend ‘Pakistan. China trades with Taiwan; China trades with India; China trades with United States of America.  The urgency of economy has influenced China to trade with its enemies, including the neighbour to which Beijing turns hostile off and on. United States imports cheap goods to reduce its cost of living while China sells to strengthen its economy. Likewise, India sells new material and buys machinery for its local industry.

Look at Wahga-Attari border. Imagine thousands of trucks laden with Indian merchandise crossing border every day. Imagine again. Indians selling their goods to Pakistanis worth 13 billion US dollars; equivalent to around 1.25 trillion Pak rupees and everything is documented. This is no joke. Pakistanis are already consuming Indian merchandise at such a cost and 80 per cent of merchandise they consume comes into their plate through informal trade. It means Pakistanis pay higher for Indian goods. Pakistanis get 50 per cent more Indian produce at the same cost or can pay less on what they are already paying higher amount of their income.

Pakistan and India are the two most populous and largest economies in the South Asian region. Then, why not Pakistan trades with its number one enemy, as does Pakistan’s number one friend with our number one enemy. Oh yes! Give most-favoured nation (MFN) status to India. The modern world has not seen any precedence of enemies turning into friends on account of sheer economic urgency. Many believe Pakistan and India can create history. At least level of hostility may be minimised as does China with its trading partners.

India agrees to bring down the number of items in its sensitive list by 30 per cent before December this year keeping in view Pakistan’s export interests. As agreed earlier, Pakistan will complete the transition of MFN status for India by the end of this year. As a result, India brings down its SAFTA sensitive list to 100 tariff lines by April next year. The items placed in the sensitive list are allowed for trade, but these attract much higher customs, duties and reduce their trading margin.  As India will notify the reduced sensitive list, Pakistan will reduce its sensitive list to 100 items over the next five years.
Trade between Pakistan and India is taking place through three channels.

‘The two countries enjoy a fairly large amount of informal trade, and also face smuggling,’ says Rais Ashraf Tar Mohammad, a Pakistani commodity trader. He cites the example of a very popular tobacco-based product, Pan Parag, which he says can be found at almost any pan shop in Pakistan even though it is among the banned items in the country.

Businessmen in Pakistan say that the demand and supply equations compel them to find extra-legal routes to bring in commodities which can be profitable. Like Pan Parag, many other products find their way into Pakistan via a third country. The products are first shipped to Colombo or Dubai, a favoured conduit for traders from both countries, and are then brought to Pakistan.

‘Third country trade is estimated to be nearly eight billion US dollars annually,’ says Siraj Qasim Teli, former president of the Karachi Chamber of Commerce & Industry. Interest ingly, animal trade makes up a large proportion of the smuggling. It is estimated that more than 600 million Indian rupees worth of animals (largely cattle) make it across the Indian border to Pakistan each year. The volume might be several times more than this figure due to the undocumented nature of the trade.

The official list of items exported to India consists of vegetables and fruits, poppy seeds, raw cotton, wool, waste wool, fine animal hair, textile yarn and fabrics, leather and leather manufactures, petroleum crude, plants for perfumes, pharmaceuticals, copper waste and scrap, articles of apparel, cloth accessories, rock salt and rice.

 Commodities officially imported from India are ginger, tea, cardamom, soybean, meal, carbon electrodes, iron ore, tendu (bidi) leaves, vegetable seeds, zinc, magnesia, refined lead, manganese ores and concentrates, books, betel leaves, sports goods, phthalic anhydride, tamarind, dyeing and tanning materials, cement, sewing machine, oil-cakes, residue of soybean, onion, organic chemicals and sugar-cane.

The trade balance in favour of India has prompted fears among certain members of the Pakistani business community, especially industrialists, of losing the domestic market to Indian manufactures resulting in a process of deindustrialisation.

A large part of the resistance in Pakistan comes from the country’s business community who feel that the higher cost of production in a relatively smaller economy in comparison to India will make them vulnerable to tough competition. Though low transport cost from India will provide the Pakistani consumers cheaper products, however, it is also likely to reduce the natural protection of Pakistan’s domestic producers.

The biggest, the richest and the strongest textile lobby in our country is opposed to MFN status to India. The textile and apparel sector continues to be the driving force for economic growth in both India and Pakistan. This sector contributes 30 percent in India and 78 percent in Pakistan. Indian textile industry is better placed than Pakistan in the post-quota scenario.  Allowing for the differences in labour and capital productivity, on average, Pakistan is a higher cost location than China, India or Bangladesh. Presently, trade in textile and clothing between India and Pakistan is almost nonexistent. Pakistan’s economy is far less diversified as compared to the Indian economy and depends heavily on the textile industry. Unless efforts are made to rectify this situation, granting unrestricted access to Indian textiles in Pakistani domestic market may have serious repercussions for the whole economy.

The powerful cement cartel is against India too. ‘The Indian cement industry will make a major dent in our business because they have an edge over their Pakistani counterparts due to differences in the tax structures of the two countries,’ maintains Tariq Saigol, chairman of the All Pakistan Cement Manufacturers Association.

Pakistani researchers are also of the view that Indian pharmaceutical goods will develop a major market presence in Pakistan because drugs are priced low in India. The pharmaceutical industry in Pakistan is also considered as a powerful cartel. Almost 95 percent of the basic raw materials used for manufacturing of medicines are imported from China, India, Japan, United Kingdom, Germany, Netherlands and others.

The volume of Pakistan’s import of chemicals and pharmaceutical products from India is not big. Our industry buys over 1100 raw materials, including over 400 ingredients from India. Out of the total imported chemicals and pharmaceutical products from India, 166 items had a lower unit value of imports compared to the unit value of the same items imported from elsewhere. These items have the potential for enhancing imports from India.

Riches! Again automobile sector is a cartel in our country. This industry operates under franchise and technical cooperation agreements with leading world manufacturers. The automotive industry contributes billion of rupees to the exchequer in the form of duties and taxes.

Compared with Pakistan, India has a strong engineering base and has successfully created a sizable capacity for production of vehicles. It enjoys a clear edge over Pakistan in the automobile sector. Indian auto companies are highly cost competitive due to appropriate levels of automation and low cost automation and have achieved a high level of productivity by embracing Japanese concepts and best practices.

Pakistan can import automotive components and spare parts from India at a lower price as presently these items are being imported from the Far East at higher prices. On the other hand, India is expected to benefit from free trade due to its low raw material, electric and labour costs. The story does not end here. Cheap but economical cars will be running on the roads of our country. Now, million dollar question is: ‘Will the powerful auto sector bigwigs allow MFN status to India?’

Small and medium-sized sector is an important sector of the economy of Pakistan. More than two million small and medium enterprises (SMEs) spread across the country contribute 30 percent to GDP and generate around 25 percent of the manufacturing sector’s export earnings. The SMEs constitute 90 percent of business and are responsible for 80 percent of non-farm based employment. However, the competitiveness of the SMEs is marred by their structural weaknesses and to some extent insufficient institutional support from the government in spite of its significant contributions to the economy.

Most of the small and medium entrepreneurs are of the view that SMEs in Pakistan do not have the kind of strength that they need to compete in a free-trade environment. Some entrepreneurs view the prospect of liberalisation of trade as a window of opportunity to improve production quality and efficiency through greater exposure to regional competition, especially with India, despite the challenges of free trade. There is an urgent need to address these issues in Pakistan, and to formulate a policy framework before entering into free trade with India.

The political rightists and hatred against India is Pakistan is also a major hurdle in granting MFN status to India. Rightwing and religious parties have openly opposed any improvement in trade relations with India. Jamaat-e-Islami’s Munawar Hasan believes that it will weaken Pakistan and destroy its economy’. Some economic analysts have also warned Pakistan to remain cautious. The current economic climate is already causing capital outflows from the country to Sri Lanka, Bangladesh, the Middle East and Africa. The Indian move can only worsen the situation. Although no economist could deny the advantages of free trade but in the current environment, Pakistan needs to be a bit more careful.