COMMENTARY
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Most Favoured Nation: New Trade Opportunities for India and Pakistan
Nisha Taneja, Pallavi Kalita
The sixth round of trade talks between India and Pakistan is noteworthy for having followed up on all the decisions taken in the fifth round of April 2011. Pakistan has decided to grant the Most Favoured Nation status to India, and the latter has initiated business-to-business and government-to-business interaction for addressing information gaps. These measures could help realise a bilateral trade potential of $25.2 billion, estimated as of 2010, an amount 10 times larger than the current $2.5 billion trade.
Nisha Taneja (ntaneja@icrier.res.in) and Pallavi Kalita (pkalita@icrier.res.in) are at the Indian Council for Research on International Economic Relations, New Delhi.
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Under the existing bilateral trade arrangement between the two countries, Pakistan permits the import of only a limited number of items from India, often referred to as the “positive list” approach. This approach is applied exclusively to India, a violation of the MFN principle. Items not included in the list are banned from entering Pakistan. During the last decade, Pakistan has increased the positive list gradually. In 2000, it permitted only 600 items for import from India. The number of items was increased to 767 in 2004 and further to 1,075 items in 2006. By 2009, it was increased further to 1,934 items.
Trading under the positive list approach has led to large informal trade flows, mostly in items excluded from the positive list. A large proportion of such trade is routed through Dubai from where goods enter into the Pakistani market after passing through Iran and Afghanistan or directly
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through Karachi by sea. The positive list approach also lacks transparency, creates uncertainties for traders and leads to high transaction costs (Taneja et al 2011).
Following soon were the sixth round of talks on commercial and economic cooperation held on 14-16 November 2011, laying down the sequencing and timeline on the move towards full normalisation of
trade relations. In the first stage, Pakistan will make a transition from the current positive list approach to a “small” negative list. The timeline laid down for the finalisation and ratification of the negative list is February 2012. In the second stage, the negative list will be phased out by the end of 2012. The new trading regime will also be applicable to all trade through the land route after the new infrastructure at Attari-Wagah is complete. The timeline for the commissioning of the new infrastructure at Attari-Wagah has been laid down to coincide with the announcement of the negative list. This is a marked change from the current practice whereby only 14 products are allowed to be traded by the road route. Clearly if these timelines are followed, there will be no contentious issues left on the MFN status.
What is noteworthy about the sixth round of talks between the commerce secretaries of the two countries is that they have followed up on all the decisions taken in the fifth round of talks held in April 2011 (Ministry of Commerce 2011c). The agenda laid down in the latter included according MFN status to India by October 2011 and addressing non-tariff barriers by setting up joint working groups and sub-groups within specified timelines (Ministry of Commerce 2011a). Pakistan has been very concerned about non-tariff barriers in accessing the Indian market. In a joint working group co-chaired by the two
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COMMENTARY commerce secretaries, in August 2011, the Pakistani side specified the non-tariff barriers perceived by its business community in sectors such as cement, processed food, textiles, surgical instruments, fruits and vegetables and leather (Ministry of Commerce 2011b). The identified barriers were related to complex and lengthy procedures in India and the lack of awareness on the part of Pakistani business and government authorities of Indian regulations and licensing requirements for a of which India’s exports to Pakistan were $2.2 billion and imports from Pakistan were $0.3 billion. The trade balance continues to be in India’s favour, with a $1.9 billion surplus for the country in 2010.
The top five commodities exported from India to Pakistan in 2010 included chemical products such as paraxylene, raw and refined sugar, cotton and woven fabrics, accounting for 56%. Sugar alone accounted for 24% of exports. Dates were the most
Table 1: India’s Export Potential to Pakistan 2010 ($ million)
Trade Approach (PTA) is used. Products having trade potential are identified as those that have (1) adequate demand in the receiving country, (2) adequate supply capabilities in the source country.
Potential trade for any commodity is given by the minimum of SE and MI less ET, where SE, MI and ET are the supplier’s global exports, receiver’s global imports and existing trade between the supplier and the receiver. The exercise was conducted
range of products. Product Product Description India’s Exports Pakistan’s Imports India’s Exports Trade Potential Code to the World from the World to Pakistan
Subsequently, in September 2011, the
271019 Petroleum oils and oils obtained from Indian government arranged an interactive bituminous minerals, other than crude 21,029.6 6,551.9 1.0 6,551.0
session between Pakistani businesspersons 271011 Light petroleum oils and preparations 15,071.7 686.4 25.5 660.9
and Indian regulators where the latter 520100 Cotton, not carded/combed 2,973.0 760.2 300.3 459.8
clarified that the standards were non-851712 Telephones for cellular networks 1,481.9 425.4 0.0 425.4
discriminatory. Further clarifications were sought by the Pakistani side at the sixth round of talks. Indian regulators provided information to the Pakistan delegation on the regulatory regime in India. It was also decided that the Indian side would send
390210 Polypropylene, in primary forms 800.0 329.1 20.6 308.5
870322 Motor vehicles 2,151.8 285.8 0.0 285.8
090240 Tea, black (fermented) 570.7 298.5 22.5 276.0
290243 Paraxylene 426.4 353.6 123.6 230.0
890520 Floating/submersible drilling platforms for light vessels, dredgers, etc 1,072.9 200.4 0.0 200.4
721049 Flat-rolled products of iron/non-alloy 662.5 199.5 0.3 199.2
its regulators to Pakistan in March 2012 for Source: UNComtrade. an interaction with Pakistani business-Table 2: Pakistan’s Export Potential to India 2010 ($ million)
| persons. Again, these measures are being | Product | Product Description | Pakistan Exports | India’s Imports | Pakistan Exports | Trade |
|---|---|---|---|---|---|---|
| taken in a very short time span within | Code 271019 | Petroleum oils and oils obtained from | to the World | from the World | to India | Potential |
| predetermined timelines. The business-to | bituminous minerals, other than crude | 1,194.8 | 2,949.1 | 2.9 | 1,191.8 | |
| business and government-to-business inter | 901890 | Instruments and appliances used in medical, | ||||
| action is an innovative, yet simple method | surgical, dental or veterinary sciences | 219 | 334.1 | 0.3 | 218.7 | |
| of addressing information gaps on the business environment between the two | 711319 520100 | Articles of jewellery and parts Cotton, not carded/combed | 576.9 216.7 | 178.1 84.1 | 0.2 0.1 | 177.9 84 |
| countries. This not only serves as a powerful means to confidence building but is an | 730690 220720 850239 | Tubes, pipes and hollow profiles Ethyl alcohol and other spirits Electric generating sets | 69.2 86.7 66.3 | 76.5 66.6 56.8 | 0.1 0.1 0.1 | 69.1 66.6 56.7 |
| effective trade-facilitation measure. | 80410 | Dates, fresh/dried | 52.4 | 95 | 0.1 | 52.3 |
Pakistan had also raised issues related to 730890 Structures and parts of towers, tubes, plates, rods, etc 46.2 149.3 0.1 46.1
customs clearance, valuation and accept-252329 Portland cement 373.8 42.5 0 42.4
ance of test certificates linked to standards. To address these concerns, a Customs Liaison Border Committee was set up to ensure expeditious clearance of goods and harmonisation of customs procedures. Nodal customs officers have been identified on both sides with whom traders can establish direct contact on all matters pertaining to delays in trade consignments, trade document requirements and other customsrelated matters.
Trade Possibilities
The trade-enhancing measures being adopted by the two countries will no doubt open up new trade opportunities for the two countries. Bilateral trade between India and Pakistan stood at $2.5 billion in 2010
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Source: UNComtrade.
important item being imported from Pakistan, accounting for 18% of total imports and cement accounted for almost 11.2% of imports from Pakistan. The top five imports from Pakistan into India included dates, cement, petroleum oil and chemical products, a ccounting for 49%.
The restrictive trade regime and the presence of large informal trade flows indicate that there is a huge untapped trade potential between India and Pakistan. There are several items that the two countries can import from each other instead of importing from the world. In order to assess the magnitude of trade possibilities (referred to as the trade potential) between the two countries, a simple Potential
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first by using Pakistan as a supplier and then using India as the supplier. Data from the United Nations Commodity Trade Statistics Database (UNComtrade) was employed. The trade data used is at the six-digit level of classification under the harmonised system of classification (HS code). The results of the exercise show an estimated bilateral trade potential of $25.2 billion in 2010, 10 times larger than the current $2.5 billion trade.
India has an untapped export potential of $21.1 billion, of which $7.2 billion is accounted for by petroleum products alone. Exports of petroleum products by India to Pakistan can increase manifold after Pakistan grants MFN status to India.
COMMENTARY
Compared to Bangladesh, Sri Lanka and Nepal, India’s exports to Pakistan in this sector are quite low. In 2010, India’s petroleum oil and products exports to Nepal were the highest at $627.8 million, followed by Sri Lanka at $598 million and Bangladesh at $110.1 million.
For the top 10 products, India’s export potential to Pakistan accounts for 45.5% of total exports. Cotton and organic chemicals like paraxylene, which are already major export commodities to Pakistan, are shown to have additional potential for exports of $459.8 million and $230 million, respectively. Other top 10 products with notable export potential include light petroleum oils and preparations, motor vehicles, telephones, tea (fermented), etc (Table 1, p 15).
Pakistan’s export potential to India in 2010 was $4.1 billion, of which $1 billion was in petroleum products. For the top 10 products, Pakistan’s export potential to India is $2 billion, which accounts for 49% of the total export potential (Table 2, p 15). Dates have an additional export potential of $52.3 billion. The top 10 products with export potential include petroleum oils, cotton, jewellery, electric generating sets, etc.
It is to be noted that India and Pakistan both have export potential in petroleum oils (HS code 271019). However, at the more disaggregated level of the HS code eight-digit level, Pakistan’s major petroleum oil export is base oil (HS code 27101960), while India’s comparative advantage within petroleum oil lies in high speed diesel (HS code 27101930), aviation turbine fuel (HS code 27101920), fuel oil (HS code 27101950) and lubricating oil (HS code 27101980).
The PTA approach is expected to yield more realistic results compared to econometric models that use bilateral trade data. Since existing bilateral trade is limited due to the positive list approach, any econometric model would not yield correct results. The PTA, however, also has its limitations. First, all computations are based on only one year’s data, i e, 2010. The advantage of using data for one year is that it allows us to focus on the most recent data, but this approach excludes items traded in previous but not in the most recent year. A second limitation of this approach is that it is conducted at the HS six-digit level and not at the eightdigit level, since the available international databases do not carry trade statistics at the eight-digit level. The PTA does not take into account differences in prices of commodities being supplied by the partner country and by suppliers from the rest of the world. However, if we assume transport and other transactions cost to be very low, given the geographical proximity between the two countries, then this approach would be more indicative of trade possibilities between them. Given the limitations of the PTA, the results should be treated as merely indicative of trade possibilities, offering ballpark figures on possible trade between the two countries.
The Broader Agenda
A more detailed examination of the fifth and sixth rounds of talks shows that the two governments have not only addressed the two major concerns of the MFN status and non-tariff barriers, but have also taken new trade initiatives to facilitate electricity trading between the two countries, petroleum trading, Bt cotton seed trade, and trade in information technology sector (Ministry of Commerce 2011c). A liberal investment regime for Pakistani investments in India, collaboration in trade p romotion activities, and opening of bank branches on both sides are other initiatives that are on the agenda for the trade talks.
What is most remarkable about the recent developments is that between April 2011 and November 2011, tremendous ground has been covered in addressing pending issues. The adherence to timelines set for every aspect on the agenda is unprecedented in trade negotiations that the two countries have had with other countries. The most tangible decision was regarding MFN status as it required approval from the Pakistani cabinet. This timely decision has restored confidence between the two countries. There is no doubt now that the blueprint laid out for implementation of the MFN will be carried out as per the timeline. Measures related to removal of non-tariff barriers have set the process of addressing all information asymmetries related to trade between the two countries in motion.
One major pending issue relates to visa restrictions. Granting of city-specific visas, requirements on police reporting on arrival and before departure, required exit from the port of entry, and delays in granting visas are some of the restrictions that limit market access for aspiring traders. In October 2011, the two sides finalised the
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draft text of the agreement for streamlining visa procedures (Ministry of External Affairs 2011). However, the contours of the agreement are not known yet. While the two countries work at easing the visa restrictions, there is no doubt that a more liberal visa regime could provide an effective channel for information exchange on trade-related matters between the two countries. At this point it is impossible to have a pessimistic view on Indo-Pakistan trade relations.
References
Ministry of Commerce (2011a): “Joint Statement of the 5th Round of Talks on Commercial and Economic Co-operation between Commerce Secretaries of India and Pakistan”, Islamabad, 27-28 April. Last accessed on 12 November 2011: http://commerce. nic.in/whatsnew/JOINT%20STATEMENT_5th_ TALKS_COMMERCIA_ECONOMIC_%20COOP-ERATION_INDIA_PAKISTAN.pdf
– (2011b): “Minutes of India-Pakistan Meeting of Joint Working Group on Economic and Commercial Cooperation and Trade Promotion”, New Delhi, 23-24 August. Last accessed on 14 November 2011: http://commerce.nic.in/WhatsNew/ Minutes_Inida_Pak_JWG_23_24_Aug_2011_New_ Delhi.pdf
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– (2011c): “Joint Statement of the 6th Round of Talks on Commercial and Economic Co-operation between Commerce Secretaries of India and Pakistan”, Press Information Bureau, New Delhi, 14-16 November. Last accessed on 17 November 2011: http://commerce.nic.in/writereaddata/pressrelease/Joint_Statement_India_Pak_ Round6th.pdf
Ministry of External Affairs (2011): “Joint Press Statement of India – Pakistan Joint Working Group on Visa Matters”, New Delhi, 14 October. Last accessed on 10 November 2011: http://mea.gov.in/ mystart.php?id=530118398
Taneja, Nisha, Shravani Prakash and Pallavi Kalita (2011): “Issues in India-Pakistan Trade Negotiations”, Economic & Political Weekly, 46(30).
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