The much touted ‘Most Favoured Nation’ (MFN) status granted to India by Pakistan is another positive step amongst several that the country has started to take towards building self-sustenance post-IMF era. This move, although carrying scent of political motivations, seems to be for the benefit of both countries; though the exact share of the benefit pie is open for debate amongst economists. The MFN status for India comes in return for lifting non-tariff restrictions on imports from Pakistan. India has also dropped its objection to Pakistan’s request for market access to the European Union at the WTO forum. Optimists believe that after years of unfruitful stand-off, a relationship based on mutual economic dependency may inspire new thinking and spawn hitherto unseen solutions… or would it?
For this it is pertinent to understand what the MFN status actually implies. In simple terms, MFN status provides trade equality among partners. This is done by ensuring that an importing country will not discriminate against a country’s goods in favour of those from a third. Once the importing country grants any type of concession to a third country, this concession must be given to the country granted MFN status. In other words, whatever the trade agreements Pakistan has with other countries, it must have the same for India. This is in contrast of a ‘positive and negative list’ maintained by Pakistan for Indian products, along with tariff based restrictions. It does not mean to say that India does not harbour objections over our produce. Even after granting MFN status to Islamabad over 15 years ago, limitations in the form of quantitative restrictions, trade facilitation, customs procedures, technical barriers to trade, financial measures, para-tariff measures and visas prohibitions have been in place. Now that the visa issue is eased, it can be hoped that these indirect restrictions can be alleviated in reality.
Pakistan’s trade with its billion-plus populous neighbour stands at $185 million in 2011. This computes to a meager one per cent of total exports since January 2011. Compare this with our traditional export avenues such as the United States (15 per cent), European Union (26 per cent), and the Middle East (13 per cent), trade with India is paltry and reflects massive unexplored potential for exports. However, when talking about possible income avenues, due consideration must also be given to the prospect of higher imports. Our imports from India total $982m – accounting for almost four per cent of total imports – since January 2011. Take note that this trade figure is not all-encompassing as some of our exports to the Middle East are intended to make their way to India via alternative routes and vice versa. Nevertheless, the potential on both sides cannot be denied.
Currently, the list of negative items restricted from import from India by Pakistan includes mainly agricultural products such as wheat, poultry, crude palm oil, cotton seeds, fertiliser, and meat, in addition to chemicals and capital goods. This policy surely has its merits; protecting our primary industry which has time and time again proved to be a comparative advantage. However, the counter can be argued for exports. With India’s booming middle class of over 350m and an anticipated GDP growth rate of seven per cent despite recessionary times, our products need the access of such a market. Textiles, cement, automobile manufacturers hold distinct advantages in comparison to our Indian counterparts. And there is little doubt that one of the reasons behind our businesses’ stunned growth has been the access to scale – or more specifically the lack of it – exactly the opportunity that India provides.
Even our richest businessman agrees. Being a proponent of free commerce with India, Mian Mohammad Mansha has been since long highlighting the need to open our borders and allow bilateral trade to take place. Not only will this bring unofficial trade into the legal fold, but also provide the opportunity to take our businesses on the world scale. One must realise that trade is based on the principal of comparative advantage; there will be certain items in which India would hold the upper hand but the converse will be true for exports as well – even China does not hold a total advantage in every department although it surely may seem like it. Banks must also be vigilant to arising trade avenues for credit advancement. Overall, it can be hoped that this move would prove to be a positive step towards establishing a clichéd memo Pakistan should have adopted long time ago: to believe in trade not aid.
The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)