Someone intelligent once said, “People who begin trading goods, stop trading bullets.” Pakistan and India traded bullets in 1965 and then again in 1971. As a consequence of trading bullets there was very little trading of goods up until 1996 when India granted MFN status to Pakistan. Over the past eight years, Indo-Pak trade has, however, risen 10 times from $344 million in 2003-04 to a current level of nearly $3 billion a year.
Consider this: Ten percent of the Pakistanis live in Karachi and is prosperous because it has a port and trades with the rest of the world. Between Karachi and the Indus River Valley, a distance of some 800 km, is the Thar Desert and the Cholistan Desert – inhabitable, inhospitable and arid. Then comes the Indus River Valley, where two out of every three Pakistanis live in and around the arc formed by Lodhran, Faisalabad, Lahore, Rawalpindi and Peshawar. This arc is Pakistan’s core-population core as well as the industrial heartland.
To be certain, no country over the past hundred years has prospered without indulging into international trade. As a matter of fact, Pakistan’s core has no one to trade with but India. That is divine-imposed geographical reality and some 12 crore Pakistanis cannot escape it.
Trade and welfare are twin brothers. Welfare – as measured by a country’s producer and consumer surplus – is always higher when borders are open for trade. It is true that the impact of open trade between Pakistan and India will be different on Pakistani consumers and producers. In the first phase, Pakistani consumers stand to gain while some Pakistani producers will be challenged. Overall, Pakistani exports to India are largely textile related while Indian exports are largely non-textile.
For Pakistani exporters, a total of 1,650 items – including woven fabrics, garments, bed linen, footwear, dates and chickpeas – have already been identified that India could potentially import from Pakistan. For Indian exporters, a total of 3,286 items – including automobiles, diesel trucks, black tea, pneumatic tires, antibiotics and reactive dyes – have already been identified that Pakistan could potentially import from India.
Currently, India imposes high non-tariff barriers on Pakistani textile, agriculture and leather related exports. Plus, there are severe “infrastructure constraints related to rail, road and sea routes” on both sides of the border (that tend to increase transaction costs). India does not allow Pakistani banks to open branches – neither does Pakistan (a potent non-tariff barrier). There are several Indian banks that do not recognise Letter of Credit from Pakistani banks and both countries continue to practice restrictive, city specific, reporting visa regimes.
As per the gravity model of trade “bilateral trade is proportional to the product of GNP of the trading partners and inversely related to the distance between them.” According to a 2007 study titled ‘India Pakistan Trade Possibilities and Non Tariff Barriers’, “there is a large untapped trade potential between the two countries. Using the Potential Trade Approach, the study finds that the export potential from India to Pakistan is to the tune of US$9.5 billion while that from Pakistan to India is US$2.2 billion.”