Sushant Sareen.
Senior Fellow, Vivekananda International Foundation.
In the irrational exuberance that is invariably on display
in the media every time leaders of India and Pakistan
meet, the subtlety of some of the signals that are sent
out is often lost. Something similar happened after the
Indian Foreign Secretary briefed the media about the
meeting between Prime Minister Narendra Modi with his
Pakistani counterpart who, along with other South Asian
leaders, had been invited to the swearing-in ceremony of
the new Indian government. The media latched on to
the words ‘the two countries could move immediately
towards full trade normalisation…’ and went overboard
in talking about the prospects of Indo-Pak trade taking-
off. But in the process they missed the significant rider
that India had put, viz. ‘…on the basis of the September
2012 roadmap’. This rider effectively reopens the entire
trade deal between India and Pakistan and nullifies the
agreement that had been reached between the
Manmohan Singh government and Nawaz Sharif
government in February 2014. The message that the
Modi government seemed to be sending was that it will
not accept the constant shifting of the goalposts on the
trade issue by Pakistan.
The first big breakthrough on the trade front came in
2011 after India withdrew its objection to the trade
concessions offered by the EU to Pakistan as part of an
aid package to help Pakistan get over the damage
caused by the 2010 mega-flood.
Apparently, India’s ‘gesture’ was part of a back room
deal with Pakistan which, in return for India withdrawing
its objections at WTO, agreed to a roadmap to open
trade and grant India the Most Favoured Nation (MFN)
status in a time-bound manner. The way India looked at
it, the damage caused to India’s exports by the EU
package for Pakistan would be adequately
compensated, both politically and economically, by the
fillip that India-Pakistan trade would receive as a result
of a trade agreement between the two countries.
Following negotiations between the then Pakistan
People’s Party-led government in Pakistan and the
United Progressive Alliance-2 government in India, a
roadmap was agreed in 2012. Under this roadmap, in a
time bound manner Pakistan would first replace the
positive list of tradable items with a negative list. This
would be followed by according full MFN status to
India. Some items would remain on the sensitive list
and this list would steadily be pared down. Pakistan’s
concerns about non-tariff barriers and trade access
were also addressed and three trade-related agreements
were struck. But Pakistan reneged on the roadmap and
apart from replacing the positive list with a negative list,
there was no further movement.
After the Nawaz Sharif government assumed office, a
new round of negotiations commenced between the two
countries. By February 2014, a new deal was worked
out which significantly altered the terms of trade
engagement. Instead of the MFN status, Pakistan now
offered a ‘Non-Discriminatory Market Access on
Reciprocal Basis’ (NDMARB). While this new
arrangement gave everything that India would get under
MFN, it was not quite MFN. This was a bilateral trading
arrangement as opposed to MFN which is a multilateral
arrangement under the WTO. Because this was a
bilateral arrangement, Pakistan was free to walk out of
it if it felt it did not serve its interests or if the gains it
anticipated from trading with India were not according
to expectation. Pakistan’s commerce minister said so in
a number of interviews he gave after striking this
agreement with his then Indian counterpart, Anand
Sharma. Since it was a bilateral arrangement, the
dispute resolution mechanism under this arrangement
would not be under WTO rules, which in turn meant that
whims and fancies of Pakistan's real rulers (who
thankfully scuttled this deal) would continue to impinge
and impose themselves on the bilateral trade.
Frankly, the February 2014 deal was an unequal bargain
loaded almost entirely in Pakistan’s favour. Sectors in
which India enjoyed a comparative advantage were
blocked while those which were of interest to Pakistan
were made part of the deal. There was no give by
Pakistan on other issues of interest to India, such as
transit rights to Afghanistan and beyond. While Pakistan
agreed to opening up trade via Wagah, this again served
Pakistan more than India. After all, if Pakistan expected
to increase its exports to India by an estimated $ 2
billion and wanted its Punjab to benefit from trade with
India, then opening Wagah was a no brainer.
Additionally, Pakistan wanted India to open banking
channels and liberalise visas but was unwilling to
address India’s serious concerns on export of terrorism
into India. The unkindest cut of all was that, in spite of
the fact that on practically every issue, it was India and
not Pakistan that has made concessions, Pakistan
waved the trade deal as a major concession that they
have given to India to kick-start the normalisation
process!
While negotiating the trade deal with Pakistan, the India
probably forgot that political or diplomatic dividend that
accrues on account of trade between two countries that
don’t share the best of relations is, or should be, at
best a by-product and not the primary motive of
normalising trade. When concessions are given which
tend to introduce distortions by undermining the
comparative and competitive advantage of one country
to protect the inefficient sectors of another country then
the logic of trade is turned on its head. India's biggest
is that it mixed politics with trade; and that was hardly
a sensible thing to do especially since the political
benefit remained iffy and the trade benefit was marginal.
Even if trade with Pakistan increased by 100%, it would
be less than 1% of India’s total foreign trade.
Fortunately, despite the extremely favourable terms
offered by India, the Pakistan army prevented the
Nawaz Sharif government from grabbing the deal.
With a new government in India, it appears that the best
possible deal that Pakistani could get is no longer on
offer, and trade negotiations will have to restart,
practically from square one.
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