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Pakistan India Bilateral Trade and The Case for Balanced Trade Normalization

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Normalization of relations between Pakistan and India doesn’t appear to be on the cards in the near term, but given geography, normalization is a matter of “when” and not “if”. The biggest beneficiary once this normalization in political relations takes place will be trade between the two countries. Pakistan Business Council (PBC) is one of the strongest proponents of a normalized trade regime between Pakistan and India provided Pakistani firms have a level playing field in India. The PBC along with its counterpart in India, the Confederation of Indian Industry (CII) have been engaging with businesses and governments on both sides of the border to have in place a framework that facilitates trade.

The PBC since 2013 has been bringing out annual research studies on the prospects of Pakistan India trade normalization and each of these have clearly come out with the same conclusion as the 2017 Study, i.e. “granting MFN status to India in the absence of a level playing field in India for Pakistani exporters, as well as not having in place WTO sanctioned trade defence mechanisms in Pakistan risks no real benefit to Pakistan from trade normalization.”

Pakistan has consistently faced a trade deficit with India – while Pakistan’s exports increased from $ 84 million in 2003 to $ 312 million in 2015, imports increased by 639 percent, from $ 226 million in 2003 to $ 1,669 million in 2015. The trade deficit however improved in 2015 when it was $ 1.36 billion, down from $ 1.71 billion in 2014.

Pakistan follows a Negative List with India whereas India follows a Non-Least Developed Countries (NLDC) Sensitive List under SAFTA. The granting of MFN status to India will replace Pakistan’s Negative List with Pakistan’s SAFTA Sensitive List and a maximum tariff of 5% would be applied on imports from India. In 2015, Pakistan’s export potential for top 50 high potential exports to India was $ 1.81 billion whereas Pakistan’s import potential from India was estimated to be $ 7.14 billion. The fact that Pakistan’s potential imports from India are about four times the size of Pakistan’s potential exports clearly indicate that imports from India will most likely penetrate the Pakistani market to a much greater degree than vice versa.

A comparison of Effectively Applied Weighted Average (%) tariffs that have been applied by Pakistan to India and vice versa show that on average in 2013, Pakistan applied a 6 percent tariff rate on India, whereas, India applied a tariff rate of 14.6 percent on Pakistan. Pakistan also has a lower Overall Trade Restrictiveness Index (OTRI) than India, with an OTRI value of 22.2 whereas India has an OTRI value of 46.7.

Further, India uses Non-Tariff Barriers excessively to discourage imports from entering into the country. Strict quality standards and certifications are imposed on imports and stringent labelling and marketing rules are applied. Hence, prudence and caution should be the defining strategy of Pakistan when dealing with India.
Before granting MFN, and fully opening up the Wagah border for Indian imports, the Pakistani Government needs to ensure that local industries are capable of effectively countering the inflow of cheap products from India and provide assistance to exporters to increase export competitiveness. A formidable trade policy should be formulated to negotiate favorable terms of trade with India.

The Pakistan Business Council (PBC) is a private sector not-for-profit advocacy platform set up in 2005 by 14 (now 60) of Pakistan’s largest businesses. The PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives, activities and a soft-copy of this report can be found on our website: www.pbc.org.pk



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