Breaking the trade barrier
9 March 2012
Pakistan finally takes steps to grant India Most Favoured Nation status.
The landmark approval by Pakistan’s federal cabinet on 23 February to phase out the negative list of tradable commodities by December of this year is no small development. The country’s current ‘negative list’ prohibits the import of certain food items, agricultural inputs, ceramics, chemicals and domestic appliances in order to protect sectors of Pakistani production that officials worry would not be able to compete against Indian goods. Currently, Pakistan maintains a positive list of only 1963 items that it allows India to export into its territory. Now, however, the cabinet has done away with the existence of a positive list entirely; instead, the country will move to a negative list of only 1200 items covering sectors such as textiles, pharmaceuticals and automotive transport – and even this list will be phased out by year’s end. Under the revised provisions, Indian traders will soon be able to sell more than 6800 items to Pakistan. Taken as a whole, it’s a major step by Pakistan towards granting Most Favoured Nation (MFN) status to India almost 16 years after India did so for Pakistan.
In 2010-11, Pakistan’s imports from India stood at USD 2.33 billion, while its exports to India were just USD 332 million. Bilateral trade is now expected to grow threefold, if government hurdles are removed. Indeed, the volume of informal trade between India and Pakistan via third countries already far overshadows the volume of formal trade. Once this aspect of the relationship normalises, many are hoping that the informal trade will also be formalised, resulting in lower transportation costs and higher revenues for both sides.
Though both Islamabad and New Delhi are currently celebrating this latest move, Pakistani businesses are not entirely convinced that the deal will prove fruitful. They believe India, which has a huge market and a massive economy of scale, holds a significant cost advantage over its neighbours. Pakistan’s business community does support the enhancement of regional trade but wants the process to be beneficial to both countries. Some sectors of the Pakistani economy – including the automotive, steel, textile, pharmaceutical and agricultural industries – fear tough competition from Indian imports, and oppose the new deal on the pretext of safeguarding local industry and jobs. Pakistani industrialists complain that they have not benefited much from the MFN status enjoyed by Pakistan. They also allege that non-tariff barriers (NTBs) imposed by India are so tough that MFN status threatens to become meaningless.
As India now seeks access to the Pakistani market for its own finished products, critics say, it must ensure equal access and opportunity for Pakistani goods and businesses in the Indian market. Such worries have been exacerbated by Pakistan’s experience of trade malpractice with China; as such, many local industries are not convinced by Islamabad’s assurances of improved customs procedures, valuation and standards.
Trade and trust
Protest is also expected from some religious groups and political parties, which have linked MFN approval with the Kashmir conflict and other grievances against India. For example, Ejaz Chaudhry, a senior leader of the Pakistan Tehreek-e-Insaf (PTI) party headed by former cricketer Imran Khan, believes the time is not yet ripe to go ahead with the plan. ‘PTI believes that local industry is not developed enough to compete with cheap Indian goods flooding Pakistan’s markets,’ he says, ‘and therefore suggests that the plan be put off for a couple of years.’ Such opinions show that significant work is still required to raise public support for the MFN initiative.
Imtiaz Mirza, a member of the internal committee on MFN formed by the Ministry of Commerce, says that efforts to promote the initiative have already begun. Mirza says that the committee is meeting with local industrialists to convince them that several safeguards are available under the World Trade Organisation (WTO) regime to protect domestic industries threatened by liberalised trade. The phrase ‘Most Favoured Nation’, he says, has disturbed some Pakistanis who continue to see India as a rival and an enemy. Mirza hopes that stakeholders will soon understand that India’s huge consumer market offers tremendous opportunities for Pakistani businesses, including access to cheaper Indian raw materials that can cut Pakistan’s production costs. However, he too urges India to ease the entry of Pakistani products, which are currently subjected to extraordinarily strict customs checks. ‘We must not oppose trade with India on grounds that both countries haven’t enjoyed cordial relations,’ Mirza adds.
Abdul Basit, former head of the Pakistan Poultry Association, suggests that Pakistan first replicate Indian agricultural policy before pitching Pakistani farmers against their Indian counterparts. Basit makes the point that Indian farmers enjoy state patronage and considerable government subsidies – around USD 30 billion per annum – whereas Pakistani farmers are left to the mercy of market forces. How, Basit wonders, can they compete with India under unequal domestic conditions? He shares a telling example: a bag of urea in India costs INR 280 – equivalent to about PKR 500 – whereas the same bag in Pakistan is priced at PKR 1800. Similarly, the Indian government charges farmers no more than INR 1700 per month for electricity used to pump water from tube-wells, whereas in Pakistan there is no upper limit on such bills.
Even 16 years after joining the WTO, Pakistani industry still fears competing with Indian industry, says Muhammad Anum Saleem, a lecturer at the Lahore University of Management Studies (LUMS) and a lawyer who specialises in the WTO. Saleem says Pakistan is still shying away from its commitments to India under WTO membership. Even the term ‘Most Favoured Nation’ is a misnomer, he suggests, as within the WTO every trading partner should be treated equally and concessions offered to one WTO member must also be offered to all others.
India gave Pakistan MFN status in 1996 but imposed non-tariff measures such as stringent quality standards, custom procedures, licensing and inspections. Remaining within the WTO’s legal framework, if the Islamabad government were now to give India MFN status, it could make use of the same exception clauses to protect the interests of its own producers. Unfortunately, Pakistan’s trade chambers and associations have failed to develop the capacity to use WTO laws in their favour, and are therefore ill equipped to take remedial measures. Saleem laments the fact that there have been no complaints registered under Pakistan’s own Countervailing Duties Ordinance or Safeguards Ordinance, and that Pakistan has been slow in applying to the WTO’s Dispute Settlement Body (DSB) in Geneva. India frequently uses the DSB and has almost 300 lawyers trained to handle such trade cases, while Pakistan has just a few. India had so far turned to the DSB 16 times; Pakistan has done so only a few times.
In order to effectively counter the perceived threat of an Indian takeover, Pakistan’s industry needs to use the Trade Defence Laws available in Pakistan, which can be pressed into service if there is any expected threat to domestic industry. It is not essential for the damage to already have been done before Pakistani industrialists approach the courts or the National Tariff Commission (NTC). These include Pakistan’s Anti-Dumping Ordinance, under which, Saleem says, domestic producers of goods in competition with imported products ‘can file an application with the NTC in Islamabad in case they feel there is a threat of an injury or [of product] dumping.’ Saleem also points out the Subsidies and Countervailing Measures Ordinance, under which applications ‘can be filed by [Pakistani] producers if a foreign government is providing subsidy to its [own] industry resulting in serious prejudice.’
If the investigation by the NTC proves the existence of a prejudicial subsidy, two remedies are available. The country can either challenge the subsidy through the WTO’s dispute settlement body, or it can impose a countervailing duty. Under Pakistani law, such protective measures can be either provisional or permanent, and both of these measures have been used successfully in the past. Saleem cites a 2010 constitutional petition to the Islamabad High Court regarding the imposition of anti-dumping duties on a category of paper board exported from China, Indonesia, South Korea and Taiwan, which the court has referred to the NTC for investigation and appropriate action.
Still, there is no denying that both India and Pakistan stand to benefit from liberalised trade, provided a mutually beneficial approach prevails. ‘Despite differences and a history of conflict, both Pakistan and India look to each other in times of need,’ says Muhammad Arif Bhatti, an expert on Pakistan’s textile industry. Bhatti illustrates his point with an example: When Pakistan’s cotton crop suffered due to the floods of 2010, the government placed orders for a million bales of Indian cotton. Similarly, he says, India has depended on onion imports from Pakistan to end shortages caused by excessive rains. However, Bhatti notes, ‘India did not execute the cotton order, and in a tit-for-tat move Pakistan put a ban on the export of onions to India on pretext that it may cause shortage in the country.’ He concludes that the situation could have been different had a higher level of level of trust prevailed between the two countries. Removing existing barriers to trade would be an important step to building such trust on both sides.
For their part, Indian officials and businessmen deny that there are any trade barriers targeted specifically at Pakistan. They also believe that Indian industry, with its advantages of innovative and scale, would be very competitive in the Pakistani market. Indian traders in a variety of sectors are today looking forward to seeing Pakistan source more products and raw materials from India. As in Pakistan, the Indian state would also see increased revenues as once unorganised trade via third countries is replaced by formal direct trade.
Indeed, if they can trust each other, both countries could reap great benefits from the new MFN deal. Pakistani stakeholders believe that the normalisation of trade could increase economic activity, regional prosperity and the prospects of maintaining peace. Additionally, curbing unofficial trade would significantly raise government revenues. Pakistani producers of textiles, agricultural products and light engineering (especially electric fans) will have access to a much larger market if India’s NTBs are removed. Another plus is that Indian goods and raw materials – which often cost less and are cheaper to transport – could substantially replace Pakistan’s imports from other countries.
~ Shahzada Irfan Ahmed is a Lahore-based journalist at The News on Sunday.