40273 The Challenges and Potential of Pakistan-India Trade Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Zareen Fatima Naqvi and Philip Schuler, Editors The World Bank Public Disclosure Authorized The Challenges and Potential of Pakistan–India Trade Zareen Fatima Naqvi and Philip Schuler, Editors The World Bank June 2007 © 2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 United States of America All rights reserved. A publication of the World Bank. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments that they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information on any map in this work do not imply any judgment on the part of the World Bank concerning legal status of any territory or the endorsement or acceptance of such boundaries. Research for this study was funded in part by a grant from the Bank-Netherlands Partnership Program. i TABLE OF CONTENTS Preface and Acknowledgements ..................................................................................iv 1. Pakistan–India Trade: Overview and Key Issues.......................................................1 Zareen F. Naqvi, Philip Schuler, and Kaspar Richter (The World Bank). 2. South Asia Free-Trade Area—Promises and Pitfalls of Preferential Trade Arrangements ..............................................................................................................29 Richard S. Newfarmer and Martha Denisse Piérola (The World Bank). 3. The “Peace Dividend,” SAFTA, and Pakistan–India Trade ...................................59 Eugenia Baroncelli (The World Bank). 4. Pakistan–India Trade: The View from the Indian Side ..........................................69 Nisha Taneja (Indian Council for Research on International Economic Relations). 5. Quantifying Informal Trade Between Pakistan and India .....................................87 Shaheen Rafi Khan, Moeed Yusuf, Shahbaz Bohkari, and Shoaib Aziz (Sustainable Development Policy Institute). 6. Pakistan and India: Possibilities and Implications for Trade in Agriculture Sectors with Focus on Wheat and Sugar ......................................................................................105 Abid A. Burki, Mushtaq A. Khan, and S. M. Turab Hussain (Lahore University of Management Sciences). 7. Pakistan–India Trade: Impact on the Textile Sector .............................................123 Garry Pursell (The World Bank). 8. Prospects for Trade in the Light Engineering Sector - A Case Study of Fan and Bicycle Industries ...................................................................................................................143 Dr. Khalid Aftab, Dr. Qais Aslam, Asif Saeed, and Uzair Ahson (Government College University). 9. Analyzing Potential Economic Costs and Benefits of Pak–India Trade: A Case Study of the Chemical Industry ..............................................................................................158 Dr. Shabbir Ahmad and Shabbir Ahmad (International Islamic University). List of Contributors...................................................................................................171 Endnotes .....................................................................................................................173 iii Preface and Acknowledgements This volume is based on background papers prepared for the Pakistan Trade Policy Notes during FY2004–2006. The Ministry of Commerce made the original request for technical assistance on trade issues in a letter of July 2003. A number of donors, including the Bank, Asian Development Bank (ADB), U.K. Department for International Development (DFID), and the European Union (EU) responded to that request by agreeing to prepare technical studies for the Ministry. The Bank took up analytical work on a range of issues as part of Trade Policy Notes, including a paper on tariff rationalization, the impact of the end of textile quotas on Pakistan, the possible implications of SAFTA and a series of papers on Pakistan–India trade. This edited volume has thematically linked the background papers on regional and Pakistan–India bilateral trade, condensed them to get their essence out, and compiled them in an edited volume to be available for a wide audience. We appreciate the collaboration on the Pakistan Trade Policy Notes by the Ministry of Commerce. H.E. Humayun Akhtar Khan, Minister for Commerce, took a lot of interest in the trade- related technical assistance and guided our work. Secretary Commerce Syed Asif Shah and former Secretary Commerce Tasnim Noorani provided valuable insights into bilateral and regional trade issues. Shahid Bashir, Senior Joint Secretary, External Trade, was our focal person on the Pakistan– India trade study and we appreciate his role and assistance. Syed Irtiqa Ahmed Zaidi, Economic Consultant, managed the donor-assisted studies, and his can-do approach was both a source of great help and an inspiration. We would also like to thank the section officers and deputy secretaries in the ministry for help with data and information. We would like to thank Miria Pigato, Sector Manager, Middle East and North Africa Region Poverty Reduction and Economic Management (PREM), for her initial team leadership on the Pakistan–India trade study and other work on Pakistan’s trade. We appreciate the financial support provided by the Bank-Netherlands Partnership Program for Capacity Building for Trade Policy Formulation and Implementation in South Asia (TF 058307) for the Pakistan–India trade study and its dissemination. The editors would like to thank Ijaz Nabi, Sector Manager, South Asia PREM, for his able guidance and innovative ideas on the background papers and on the edited volume. Manuela Ferro, Lead Economist for Pakistan, pushed us to compile the edited volume on the important issue of regional trade and Pakistan’s trade with India, so that it would be available to a range of stakeholders. Kaspar Richter, Senior Economist, South Asia PREM, came in late in the process but provided constructive inputs in editing the volume. Nusrat Sultana Chaudhry and Syed Sayem Ali provided valuable research assistance. Muhammad Shafiq, Shahnaz Rana, and Irum Touqeer provided invaluable support in handling all logistical arrangements for the mission and with processing the volume. The volume draws upon the contributions from the authors of eight background papers. We would like to thank all the contributors and teams for going through an almost two-year process of preparing papers, participating in various workshops to discuss results with the government at different stages, and then helping us put together the shortened versions of the original papers. We would also like to thank the peer reviewers who helped us improve the technical quality of the papers. The peer reviewers are Tercan Baysan, Marcelo Olarreaga, and State Bank of Pakistan (Eugenia Baroncelli’s paper); Richard Newfarmer (Nisha Taneja’s paper), Amer Z. Durrani and Central Board of Revenue (Sustainable Development Policy Institute [SDPI’s] paper on informal trade), Don Mitchell, Tekola Dejene, and Ministry of Food Agriculture and Livestock’s (Lahore University of Management Sciences’ [LUMS’s] paper on the agriculture sector), Paul Brenton and Ministry of Textiles (Garry Pursell’s paper on textile sector), Peter Walkenhorst and Engineering Development Board ([Government College University’s [GCU’s] paper on the engineering sector); and Calgar Ozden and Pakistan–India CEOs’ Business Forum (International Islamic University’s [IIU’s] paper on the chemicals sector). We would also like to acknowledge the collaboration of the Lahore Chamber of Commerce and Industry and the Pakistan–India CEOs’ Business Forum in disseminating the findings of this study. iv Chapter 1 Pakistan–India Trade: Overview and Key Issues Zareen F. Naqvi, Philip Schuler, and Kaspar Richter The World Bank Over a half -decade into the launch of Pakistan’s economic reforms, trade with India remains negligible. The share of total trade between Pakistan and India measured by the sum of the bilateral exports amounted in 2004 to only 0.9 percent of total exports between India and Pakistan. This is less than 40 percent of the equivalent measure for trade between Malaysia and China, two countries of comparable gross domestic product (GDP), and only 9 percent of the trade that occurs between Argentina and Brazil, two countries of comparable size and proximity.1 Pakistan–India trade is not just low; it also falls short compared to what it could be. Recent estimates on trade potential range from $3 to $10 billion, while the annual official trade flows over the last six years averaged to no more than $400 million.2 Since Pakistan and India account for almost 90 percent of South Asia’s GDP, low bilateral trade is an important constraint for growth of South Asian exports to the rest of the world, as well as for an expansion of intraregional trade. South Asia’s trade grew to only $126 billion in 2005 from $12 billion in 1980, while East Asia, a region of comparable size in population and GDP, saw its exports increase in the early 1980s to over $1 trillion from $48 billion.3 Over the same period, intraregional trade as a share of total trade within South Asia rose to