India-Pakistan Economic Cooperation: Implications for Regional Integration in

South AsiaSelim Raihan

Professor, University of Dhaka, and Executive Director, SANEM, Dhaka, and

Prabir DeFellow, RIS, New Delhi

Presented at the International Conference on “Regional Trade and Economic Cooperation in South Asia: Trends,

Challenges and Prospects”, 2-3 May, 2013, New Delhi

Based on a Paper by Selim Raihan and Prabir De for Commonwealth Secretariat, London

1

Why Pakistan – India Economic Cooperation so important?

• ‘Two-way’ MFN between India and Pakistan would infuse new dynamism into South Asia regional integration process.– Soon after establishment of the WTO in 1995, India granted the MFN

status to Pakistan. – Pakistan has decided to extend the MFN status to India in 2012, and

replaced the restricted positive list with a negative list in February 2012.

– India reciprocated it by allowing FDI from Pakistan.• Potential to have strong spillover into South-South

Cooperation, pan-Asian integration, a.o.

• Global peace and security

2

What are the major trends?

• Increased access to each other’s markets in goods and services through trade liberalisation including removal of NTBs,

• Strengthening trade facilitation including improvement in physical connectivity, and

• Allowing investments to flow in each other countries.

3

India – Pakistan bilateral trade contributed less to the rise of intra-South Asia

Regional trade as share of total

• S Asia 4-5%

• ASEAN 20-25%

• EU over 60%

• NAFTA 30-40%

• Pakistan and India account for

– almost 92% of South Asia’s GDP

– 85% of South Asia’s population, and

– 80% of South Asia’s surface area

• whereas only 20% of the regional trade is India-Pakistan trade. 4

South Asia’s two largest economies barely trade with each other (bilateral trade as %

of country’s total trade)………

5

…………huge rise of trade imbalance between the two countries

6

Gap is widening with India’s export to Pakistan growing faster

7

Bilateral trade is presently limited to few products and underutilized, but scopes of

huge expansion • Exports from India to Pakistan: Limited to about 14

commodities in 2010-11, around 78% of the total Indian exports to Pakistan. – sugar, raw cotton, synthetic fabrics, tea, petroleum products and chemicals

• Export from Pakistan to India: Limited to 18 commodities in 2010-11, 88% of the total Pakistan’s exports to India. – fruits and vegetables, wool and products, petroleum products, chemicals,

lead, and more recently cement.

8

Major disturbances and apprehensions to bilateral trade……

• Political disturbance

– Bilateral trade and commerce were held hostage to resolution of political disputes.

• Protectionism

– Domestic industry in Pakistan has feared it would be swamped by imports from India.

• Restrictive trade policies in both countries

– Variety of trade barriers targeted to each other’s market.

9

…. and the outcomes are, which lead to generate…….

• Large informal trade. A great deal via Dubai, a trade process, which is inefficient and fraught with illegalities.

• Piling of bilateral barriers to trade, which are “thick” at the land border.

• Ambiguity, market imperfections and information asymmetries in trade

• Accumulation of ‘trust deficit’ and ‘misunderstanding’.

10

…… large trade barriers to bilateral trade

• The average tariff is not the major barrier.• In promoting trade between India and Pakistan, the major

stumbling block is the presence of NTMs– Only a limited number of items are allowed to be transported via

rail/road. Road network quality is low. Rail networks between ports and markets are often missing.

• The imposition and application of standards in India is often perceived as NTB by Pakistan.

• Weak information flows on trade related matters • Mismatch exists between the HS classification of goods. • Most bilateral payments are made through the Asian Clearing

Union and businessmen in both countries have complained about the inefficiency of this procedure.

• Redressal mechanisms for grievances do not exist.• Banking system and insurance yet to come in place

11

Three important research questions

• Will ‘two-way’ MFN lead to promote bilateral trade as greater incentive to each other? Or shall we look for MFN+?

• Will ‘two way’ MFN bring new momentum to SAARC?

• What are there for smaller countries in SAARC?

We use CGE modeling to answer to the questions and more importantly

to understand the emerging direction

Methodology – measurement of unit cost

• We identify 561 products for Pakistan at the 6-digit HS level from the World Bank’s WITS database, where the unit costs of imports if they are sourced from India would be lower than the unit costs of imports if they are sourced from other countries.

• The percentage differences in unit prices for these 561 products at the 6 digit HS code are then aggregated into GTAP sectors matching the concordance and weights for respective products.

14

Calibrating the MFN scenario

• A fall in import price for Pakistan while importing from India.

• We assume there would be some ‘peace dividends” for all the South Asian countries because of this improved trade relation between India and Pakistan.

15

Scenarios going beyond MFN

• Several other scenarios in the GTAP framework.

– a bilateral FTA between India and Pakistan,

– a bilateral FTA plus increased bilateral trade facilitation,

– a SAFTA scenario

– a SAFTA scenario plus regional trade facilitation scenario.

– all these scenarios incorporate MFN scenario.

16

Mere MFN no best solution:Comparison of Welfare Effects

Country MFN

MFN plus IND-PAK

FTA

MFN plus IND-PAK FTA with bilateral

trade facilitation

MFN plus SAFTA

MFN plus SAFTA with

regional trade

facilitation

Bangladesh 21.08 -2.58 -14.59 -111.77 1479.56

India 160.71 376.43 2288.46 1810.73 5452.03

Nepal 18.01 -0.65 -6.85 485.03 1654.21

Pakistan 99.21 443.96 1964.11 1121.67 2618.38

Sri Lanka 34.92 -4.28 -15.56 71.88 2173.12

Rest of SA 15.72 -20.27 -41.22 298.21 1265.02

17Unit: Equivalent variation in US$ million at 2007 prices

Mere MFN no best solution:Change in Pakistan's Exports (%)

18

Mere MFN no best solution:Change in India's Exports (%)

19

Bring back the momentum on track!

• Both governments must be much more ambitious (e.g. give India MFN, and remove positive list on border, India reduces sensitive list in return)

• Pakistan needs to focus on improving customs and scrapping the remaining negative list on trade

• But India must take bigger responsibilities.• India should dare to be generous, removing non-

tariff measures, cutting duties on Pakistani imports and making it easier to invest in India.

20

Ways to Facilitate Bilateral Trade: Three policy options

• First, further deepening of trade liberalisation (e.g. removal of NTMs, reducing the sensitive lists, DFQF access to products where marginal return from trade very high, removal of quantitative restrictions).

• Second, support trade facilitation to complement the trade liberalisation (e.g. remove the delay in payment between exporter and importer by introducing net banking, allow more banks to operate). Improvement of connectivity and border infrastructure.

• Third, make the FDI flow move freely between the two nations (e.g. build the institutional mechanism for bilateral investment guarantee).

21

Thank you