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Can trade do for India-Pak ties what politicians have failed to do?

By Riya Sinha and Shehzad Poonawalla
September 04, 2015 10:06 IST

Since multilateral trade creates a stable, peaceful world, normalisation of bilateral trade between India and Pakistan will start a series of peace building measures, especially along the bordering areas of both States, say Riya Sinha and Shehzad Poonawalla.

The usual narrative of foreign relations is to put a premium at reducing conflicts and fighting as the first priority of bilateral or multilateral engagement and then to create a conducive atmosphere and ambience for facilitation of trade and other relations between conflicting nations. This theory puts the onus on the political class of conflicting nations, vesting them with too much to control the combined destinies of their people.

The learning, if any, from the relatively more peaceful seven decades in world history, devoid of any world wars, is completely opposite of this conventional wisdom. It is not just better political relations that lead to trade but increased trading and economic interests that can be a driver for harmonious political ties between nations, confirms a Stanford study.

'From 1950 to 2000, the incidence of interstate war has decreased nearly tenfold compared with the period from 1850 to 1949 (which saw two world wars). At the same time, since 1950 international trade networks have increased nearly fourfold, becoming significantly more dense,' it says. It is multilateral trade that creates a more stable, peaceful world.

And if this theory can bring the longest lasting relative period of peace to a world that was at the brink of annihilation twice and unite countries like England and France (who fought a Hundred Years’ War) into an entity called the European Union, there is no reason why, if this theory is applied in the India-Pakistan context, it would not lead to a new narrative of bilateral relations between the two nations -- divided by geography and united by history.

Trends in India-Pakistan trade

Currently, India’s trade with Pakistan stands at 0.3 per cent of India’s total global trade, while Pakistan’s trade with India is around 3 per cent. Over the last two decades, bilateral trade has grown between the two countries. This trend paints a hopeful picture despite the various instances of conflict and ceasefire violations. Bilateral trade only showed slowdown twice, from 2001 to 2004, following the attack on Indian Parliament and after the Mumbai terror attack of 2008.

The first step to delink trade from politics was taken in 2004 in the form of a composite dialogue during the commerce secretary level talks on commercial and economic co-operation between India and Pakistan. This had three pertinent outcomes -- expansion of Pakistan’s positive list for trading with India, opening of land route for trade in 2005, and amendments in the restrictive maritime protocol. Apart from this, in 2008, as a part of confidence building measures, LoC trade was started in Jammu and Kashmir, providing trade as a feasible alternative to the people of the region.

After the fifth round of talks, Pakistan amended the positive list to a negative list in 2012 comprising 1,209 items. The implication of this was simple -- the negative list would be subsequently reduced and Pakistan would grant Most Favoured Nation (MFN) status to India. However, this development is yet to see the light of the day.

Improved India-Pakistan trade would benefit both countries in various sectors such as economic growth, access to larger markets, energy sector co-operation and promote overall regional stability. Formal bilateral trade has 10 times the potential for improvement if the informal trade is channelised through it. Informal trade between both States consists:

  • Re-routing trade through a third country (eg, Dubai), and
  • Illegal trade through land border. This is estimated at $3 billion.

Both governments are likely to gain much in the energy sector too, with the stalled Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline becoming operational to supply 33 billion cubic metres of gas to India and Pakistan for a 30-year period. For growing economies of the size of India and Pakistan, this pipeline would help accelerate domestic economic development.

If a large part of the people in Pakistan Occupied Kashmir or Pakistan find that their own jobs and incomes are substantially connected to economic centres in India, they would be less likely to support, tolerate or turn a blind eye to anti-India activities that take place in their own backyard.

The way forward

Until September 2014, India-Pakistan bilateral ties seemed to witness progress. However, after the cancellation of talks between the two countries’ foreign secretaries in August 2014, and the recent cancellation of NSA talks, the way forward on the political front looks gloomy. However, trade, if delinked from the politics of the region, has significant potential for growth. For this, both States need to take significant measures as below:

For India, it makes much more sense to include Pakistan in its search for new markets. Greater trade with Pakistan, apart from being pertinent from the security point of view, opens up opportunities for access to the markets of Central Asia. For Pakistan, it means access to the 400 million middle-class consumers in India for its products, creating a positive impact on Pakistan’s economy.

To culminate this, both countries need to adopt a series of measures like Pakistan granting MFN status to India, reduction of non-tariff barriers such as infrastructure deficits for trade along borders, and a revised visa regime to allow Indian businessmen into Pakistan and vice-versa. 

Second, increase in bilateral trade means opening up of land borders for trade which will significantly lower the transaction cost for traders, and subsequently, lower prices for millions of consumers on both sides. This can be helpful in tackling poverty on both sides, and increase co-operation, as was evident during the commissioning of LoC barter trade in 2008.

More trade also means governments can earn more through customs revenue (which is not possible in the case of informal trade), and thus increase in the amount required for peripheral developments such as infrastructure for trade.

Third, for trade to grow there is no other alternative than economic dialogue. The 2004 composite dialogue, in its five rounds till 2012, led to a series of trade facilitation measures such as change from positive to negative list, amendments in maritime protocol and bilateral confidence building measures. There is a need for such dialogues to continue if trade between both countries is to be seen as a peace initiative. 

Normalisation of bilateral trade between both countries is necessary, but not an end in itself. Rather, it must be seen as a start of a series of peace building measures, especially along the bordering areas of both States which is the worst affected from the on-going conflict.

Deep bilateral economic interests, when they reach a stage of critical mass, can become stronger than the existing vested politico-economic interests, on both sides that prefer to see the two nations at a perpetual state of conflict. It can act as a catalyst to mould public opinion through the media of both nations, equip moderate politicians with a stake in bettering relations with financial and political might to take on hardline elements in the security and army establishments on both sides, who gain from increased conflicts that require increased financial spending on arms, ammunition and operations.

It can reduce the appetite for hard line positions and rhetoric by linking economic interests and prosperity of people on both sides to a great extent. Of course terrorists will try to sabotage this by hitting it where it hurts the most and will attack trade/economic initiatives between India and Pakistan.

But investing in better security and counter–terror mechanisms, funded out of the growing prosperity, can offset that to a great extent. It also takes no rocket science to figure that if a large part of the people in Pakistan Occupied Kashmir or Pakistan find that their own jobs and incomes are substantially connected to economic centres in India, they would be less likely to support , tolerate or turn a blind eye to anti-India activities that take place in their own backyard.

History is ripe with examples of improved bilateral relations through trade in the form of European Union, ASEAN, India-China trade and US-China trade. Learning from these experiences and exploiting the huge market potential, India and Pakistan must allow trade and economics do what the politicians have been unsuccessful at for so many decades -- hammer out a long lasting peace.

Photographs: Reuters

Riya Sinha, international relations expert, and Shehzad Poonawalla, political activist, are founding members of Policy Samvad, a Delhi based think-tank.

Riya Sinha and Shehzad Poonawalla