Pakistan-India Trade: Pakistan-India Trade: What Needs to Be Done? What Does It Matter? What Needs to Be Done? What Does It Matter?
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Pakistan-India Trade: Pakistan-India Trade: What Needs To Be Done? What Does It Matter? Edited by What Needs To Be Done? What Does It Matter? What Needs To Michael Kugelman Robert M. Hathaway Pakistan-India Trade: What Needs To Be Done? What Does It Matter? Edited by Michael Kugelman Robert M. Hathaway This publication marks a collaborative effort between the Woodrow Wilson International Center for Scholars’ Asia Program and the Fellowship Fund for Pakistan. http://www.wilsoncenter.org/program/asia-program http://fffp.org.pk/ Pakistan-India Trade: What Needs To Be Done? What Does It Matter? Essays by: Amin Hashwani Ishrat Husain Kalpana Kochhar and Ejaz Ghani Michael Kugelman Zafar Mahmood Ijaz Nabi Nisha Taneja Arvind Virmani Edited by: Michael Kugelman Robert M. Hathaway © 2013 The Wilson Center www.wilsoncenter.org Available from : Asia Program Woodrow Wilson International Center for Scholars One Woodrow Wilson Plaza 1300 Pennsylvania Avenue NW Washington, DC 20004-3027 www.wilsoncenter.org ISBN: 978-1-938027-13-0 THE WOODROW WILSON INTERNATIONAL CENTER FOR ScHOLARS, established by Congress in 1968 and headquartered in Washington, D.C., is a living national memorial to President Wilson. The Center’s mission is to commemorate the ideals and concerns of Woodrow Wilson by providing a link between the worlds of ideas and policy, while fostering research, study, discussion, and collaboration among a broad spectrum of individuals concerned with policy and scholarship in national and international affairs. Supported by public and private funds, the Center is a nonpartisan institution engaged in the study of national and world affairs. It establishes and maintains a neutral forum for free, open, and informed dialogue. Conclusions or opinions expressed in Center publications and programs are those of the authors and speakers and do not necessarily reflect the views of the Center staff, fellows, trustees, advisory groups, or any individuals or organizations that provide financial support to the Center. The Center is the publisher of The Wilson Quarterly and home of Woodrow Wilson Center Press, dialogue radio and television. For more information about the Center’s activities and publications, please visit us on the web at www.wilsoncenter.org. BOARD OF TRUSTEES Joseph B. Gildenhorn, Chairman of the Board Sander R. Gerber, Vice Chairman Jane Harman, Director, President and CEO Public members: James H. Billington, Librarian of Congress; John F. Kerry, Secretary, U.S. Department of State; G. Wayne Clough, Secretary, Smithsonian Institution; Arne Duncan, Secretary, U.S. Department of Education; David Ferriero, Archivist of the United States; Fred P. Hochberg, Chairman and President, Export-Import Bank; James Leach, Chairman, National Endowment for the Humanities; Kathleen Sebelius, Secretary, U.S. Department of Health and Human Services Private Citizen Members: Timothy Broas, John T. Casteen III, Charles Cobb, Jr., Thelma Duggin, Carlos M. Gutierrez, Susan Hutchison, Barry S. Jackson Wilson National Cabinet: Eddie & Sylvia Brown, Melva Bucksbaum & Raymond Learsy, Ambassadors Sue & Chuck Cobb, Lester Crown, Thelma Duggin, Judi Flom, Sander R. Gerber, Ambassador Joseph B. Gildenhorn & Alma Gildenhorn, Harman Family Foundation, Susan Hutchison, Frank F. Islam, Willem Kooyker, Linda B. & Tobia G. Mercuro, Dr. Alexander V. Mirtchev, Wayne Rogers, Leo Zickler Contents The Pakistan-India Trade Relationship: 1 Prospects, Profits, and Pitfalls Michael Kugelman Moving Toward Pakistan-India Trade Normalization: 18 An Overview Zafar Mahmood Pakistan’s Trade with India: Thinking Strategically 31 Ijaz Nabi Perspectives from India 53 Arvind Virmani Managing India-Pakistan Trade Relations 59 Ishrat Husain Additional Trade Challenges: Transport, Transit, and 75 Non-Tariff Barriers Nisha Taneja What Can India and Pakistan Do To Maximize the 97 Benefits from Trade? Kalpana Kochhar and Ejaz Ghani | vii | Contents Non-Trade-Related Stakes of the Pakistan-India Relationship 116 Amin Hashwani Recent Asia Program Publications 129 Information About Woodrow Wilson Center Pakistan 134 Scholar Program | viii | The Pakistan-India Trade Relationship: Prospects, Profits, and Pitfalls MICHAEL KUGELMAN n November 2011, the government of Pakistan announced its de- cision to grant Most Favored Nation (MFN) status to India. This Imeans that India, in principle, will enjoy lower tariffs and fewer trade barriers in its economic relationship with Pakistan. The decision, which followed New Delhi’s extension of MFN status to Pakistan in 1996, underscores Islamabad’s willingness to deepen commercial ties with its long-time nemesis. The potential for greater trade between the two is considerable. Current trade volume is less than $3 billion, but some experts estimate that a normalized trade regime could eventually send the figure soaring to $40 billion.1 Such projections take into account, in part, the large vol- ume of informal Pakistan-India trade, which not long ago equaled that of formal trade, and is now estimated at about $1 billion. With more for- mal trade, according to an estimate from 2011, more Indian cotton, pe- troleum products, telephones, cars, organic chemicals, and tea will flow into Pakistan, while more Pakistani dates, jewelry, medical supplies, and petroleum oils will surge into India.2 Many of these exports are now transacted informally (such as by smuggling or through third countries). TRADE TALK In 2012, intensified trade diplomacy between Islamabad and New Delhi yielded a range of achievements. Early in the year, Pakistan abolished Michael Kugelman is the senior program associate for South Asia at the Woodrow Wilson International Center for Scholars. | 1 | Michael Kugelman its positive list of 2,000 goods that could be imported from India, and replaced it with a negative list of about 1,200 items that could not be imported (more than 500 of these untradeable items belonged to the automobile, iron, and steel sectors). Islamabad pledged to eliminate this negative list entirely by the end of 2012, thereby bringing the two coun- tries closer to a fully operational MFN regime. In April, the two capitals launched a new integrated checkpoint at the Attari-Wagah land border crossing, generating promises from both countries that trade through this sector would increase tenfold. On the same day, India announced that it would permit foreign direct invest- ment (FDI) from Pakistan. Over the summer, New Delhi removed a ban on Pakistani businesses setting up operations inside India. In September, the two sides concluded a landmark visa agreement that loosens travel restrictions. Later in the year, Islamabad announced new measures to boost capacity on its side of the Attari-Wagah border, including the in- stallation of additional scanners and weighbridges, and the deployment of more customs officials to the site. Many observers believe increased trade will benefit each country’s economy, but also build constituencies for more cooperative bilateral relations—in effect opening the door to progress on core political and security issues. This is certainly an argument endorsed by Islamabad. Several months after Pakistan’s MFN announcement, Pakistani Foreign Minister Hina Rabbani Khar stated in a speech at the Lahore University of Management Sciences (LUMS) that more trade with India would enhance Pakistan’s prospects for peace and prosperity, and “put in place the conditions that will enable Pakistan to better pursue its principled positions” on territorial issues.3 In 2012, recognizing the significance of trade in the Pakistan-India relationship, the Asia Program of the Washington, DC-based Woodrow Wilson Center, with co-sponsorship from the Wilson Center’s Program on America and the Global Economy, and with generous support from the Karachi-based Fellowship Fund for Pakistan, hosted a conference on Pakistan-India trade. The contributions in this volume were originally presented at this conference. | 2 | The Pakistan-India Trade Relationship: Prospects, Profits, and Pitfalls THE ROAD TO MFN In the first essay, Zafar Mahmood, Pakistan’s commerce secretary at the time of the conference (he was appointed water and power secretary several weeks later), offers an insider’s account of the events leading to Islamabad’s decision to grant MFN status to New Delhi. When the two sides restarted their Composite Dialogue process in 2011 (it was launched in 2004, but suspended after the 2008 Mumbai terror attacks), a break- through on trade may have seemed unlikely. Pakistan was still unhappy about the revelation—brought to light in a 2007 analysis produced by an Indian think tank—that Indian traders importing goods from Pakistan were under surveillance by Indian intelligence agents. Additionally, to Pakistan’s chagrin, India—despite Mahmood’s personal appeal to New Delhi’s World Trade Organization (WTO) ambassador—was opposing a European Union (EU) assistance package offered to Pakistan in the aftermath of the latter’s devastating 2010 floods. Mahmood credits the savvy diplomacy of Anand Sharma, India’s commerce minister, for helping engineer a turnaround. Sharma invited his Pakistani counterpart to New Delhi in September 2011. The meet- ing resulted in India dropping its opposition to the EU package, and both ministers agreed to pursue full trade normalization. This visit, Mahmood writes, “created a conducive environment for Pakistan to move forward,” and in early November Pakistan’s Cabinet reached its MFN decision. PAKISTAN-INDIA TRADE: A CHECKERED PAST According to Mahmood, cordial