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Making the Case for Free Trade with India

by Khaled Ahmed

File photo. Rouf Bhat—AFP

A South Asian trade bloc is essential for the sustainable growth of all regional economies

In August 2019, reacting to India’s decision to unilaterally abrogate occupied Kashmir’s special status under its constitution, Islamabad downgraded diplomatic relations with Delhi and suspended bilateral trade, bringing it down to just $280 million in fiscal year 2020-21. Pakistan also suspended the import of Indian goods under the Pak-Afghan transit treaty; decisions taken by the National Security Committee and a joint session of Parliament that were endorsed by Prime Minister Imran Khan.

By February 2022, however, signs of flexibility in Pakistan’s tough line have started appearing, as claimed by one of Pakistan’s leading businessmen, Mian Muhammad Mansha, at a gathering of entrepreneurs at the Lahore Chambers of Commerce and Industry.

Mistakes of the past

Rumors of “backchannel talks” brokered by a “Gulf state” have persisted since summer 2021, despite the Pakistan Tehreek-e-Insaf (PTI)-led government throwing cold water on expectations by saying “the talks were discontinued due to Indian repression of the people of held Kashmir, as well as its refusal to recall its troops from the valley and restore its special status.” Nonetheless, Mansha, now chairman of the advisory council of the British Asian Trust in Pakistan, has continued to talk of free trade under the South Asian Free Trade Area (SAFTA), an agreement inked in January 2004 at the 12th SAARC [South Asian Association for Regional Cooperation] summit in Islamabad.

Talking to Ajay Shukla of India’s Business Standard Jan. 25, 2013, Mansha said: “I see a major change here. Pakistan’s media has created a new awareness, changing thinking amongst our people, the foreign office, the security establishment and the political parties. No political party in Pakistan opposes trade with India. In India it is different; there is still opposition there. Also, opinion is more regionalized in India: a person in Madras or Bengal does not yet understand that the fruits of trade will go there too. India must think about what will happen if Pakistan turns out to be like Afghanistan. What if there is turmoil in Pakistan? If there are huge problems here they will spill over into India too.”

This kind of trade-with-India talk however was not liked. The National Accountability Bureau (NAB) took action against him, clearly harassing him as it had many other businessmen of Pakistan, to the detriment of the national economy. Finally, the Lahore High Court took notice in 2019 and restrained NAB from taking coercive measures against him in a case of alleged money-laundering.

SAARC and SAFTA set aside

The Indo-Pakistan squabble has tended to roll back the rare good that emerged from the now defunct SAARC, created in 1985, and SAFTA, created in 2004. Who is causing these fatal rollbacks? Mansha told Business Standard: “People who don’t want to change and who fear that their industries will be affected by opening to India. They use arguments like, ‘look what happened at Partition.’ There is a false perception that Indian companies will swamp us. Instead, I think they would complement us. Look at Standard Chartered Bank: it has 89 branches in India and makes $1.2 billion in profit, but in Pakistan they can’t compete with us. In the banking sector, we cleaned up our banks 10-15 years ago. I would love to have my branches in India.”

Pakistani nationalism may be anti-India and anti-trade, but the way people look at the situation is changing. Daily Dawn, on March 4, 2010, reported: “Speaking at a seminar on Regional Economic Integration, organized by Islamabad Chamber of Commerce and Industry in collaboration with SAARC Chamber of Commerce and Industry, experts and business leaders stressed the need for a stronger political will to implement SAFTA and boost trade and commerce in the region.”

Businessmen as policy innovators

Daily Express Tribune, in a report published on March 2, 2010, reported that Pakistani businessmen, gathered in Karachi, complained that unless politics was straightened out between India and Pakistan economic relations would not prosper. The dream of full-fledged trade relations remained unfulfilled as the foreign ministers of the two countries muddied the waters that August instead of clearing the air for a move forward. Mani Shankar Aiyar, who was possibly the only high-profile Indian with an impartial view of Pak-Indo ties thought then-(and incumbent) Pakistani Foreign Minister Shah Mehmood Qureshi had lost his cool—or was made to do so—after a meeting that had gone on well. Later, as Pakistan sought to overcome the impact of devastating floods, Islamabad decided to refuse $25 million in “direct aid” from India even as it complained that that international aid was being delayed because it had to go through the middlemen of international agencies.

According to Express Tribune, Pakistani businessmen—who were not to blame for it—debunked the security-based government cliché that without political reconciliation, it would be impossible to take trade ties to significant levels. “After decades of relying on this mantra we have actually come to the conclusion that instead of politics driving trade, trade should drive politics,” it quoted them as saying. “Pakistan posits the precondition of Kashmir for any move forward on trade. Apart from a one-time waiver under Musharraf for the Iran-Pakistan-India gas pipeline, Pakistan has thwarted all efforts at free trade and transit routes to regional trade agreed at the level of SAARC. Here what becomes a problem is not lack of political will but a peculiar militaristic interpretation of geopolitics of Pakistan.”

The trap of geopolitics

There are two ways of looking at geopolitical importance, or two ways of deriving benefit from it. One is the “civilian” approach, which says that a geographically important state has to develop its roadways and railways and other infrastructure, such as hotels, to facilitate those who wish to pass through. Once the geographically “connective” state has become an effective corridor of passage, its “strategic” importance would no doubt increase. And the dividend of this importance would come in economic terms and through an absence of war. The other way is the “military” approach, which relies on geography as “hindrance” rather than “connection.” The military mind says: we are in the middle and we will not let you pass unless you agree to our terms. (To India, we say let’s talk Kashmir before we talk free trade.) This is a warrior’s approach and signals their opposition to economic activity. In the case of Pakistan, it is the military view of “geopolitical importance” that has held sway.

The problem with Pakistan is that its judgement of right and wrong takes place in complete isolation from the rest of the world. Any legal position is useful in international politics in so far as it is able to persuade other states to go along with it or support it. There is no international law to implement moral and legal judgements apart from the international support you can line up behind your case. Many of Pakistan’s positions, including on Kashmir, have been eroded by a total lack of international support.

Politics of paranoia

Pakistan has reacted to this with collective paranoia induced in most cases by its security agencies. If it signs a transit treaty with Afghanistan for trade to India—which is clearly to the advantage of Pakistan, “despite” not “because” of the fact that India is excluded—a barrage of criticism descends through the media. And if America welcomes this treaty, Pakistan suspects that it wants Delhi and Islamabad to come close through transit routes. The truth is that the entire world should put pressure on Pakistan to complete its strangely attenuated and much-delayed dream of becoming prosperous and geographically important by transforming itself from a warrior state to a transit state for the region.

Businessmen who traded with India used to complain of protectionism, and Pakistan’s high commissioner in New Delhi kept delivering warnings of stoppage if conditions hampering Pakistani exports were not removed. Today, the only way this can be avoided is to enter into a new treaty relationship and spell out the conditions that will guide the two trading partners. The going will be tough, as the world has realized, but India is passing through its own process of “change of paradigm.” Economist Shahid Javed Burki wrote in daily Dawn on July 27, 2010: “One way of dealing with the Indian conundrum is to change the basis of the dialogue. It might be time to put history on the back-burner and let economics take center-stage. Some problems are too intractable to be resolved through dialogue.”

Wisdom-based nationalism

Shahid Kardar, when he was president of the State Bank of Pakistan, had written in Daily Times on May 8, 2003: “The fear of the Pakistani manufacturing sector being swamped and rendered uncompetitive by Indian goods is highly exaggerated. The signing of the South Asian Free Trade Agreement (SAFTA) at the recent SAARC summit has been welcomed even by the community of Pakistani industrialists who have greeted an opportunity to improve the quality, efficiency and cost-effectiveness of local industry through greater exposure to external competition.”

Mansha is on track for a wisdom-based Pak-Indo relationship when he explains in detail how Pakistan could benefit from opening trade with India: “We have important complementarities in cotton. Pakistan’s cotton harvest starts from June-July, and India’s from November. Why should Indian mills store cotton for a full year when they can buy four months’ stock from Pakistan, and we can buy from India for the next few months. The cost of inventory will come down in both countries. Monsanto has a plant in (Indian) Punjab that develops BT cotton seeds. They can also access the Pakistani market. India’s cotton-growing practices are excellent.

“In textiles, we are very strong in certain segments. Pakistan has good high street fashion at affordable prices, which India could buy. Pakistan’s textiles exhibition was sold out in three days in Delhi (in April). My wife is in the textile business and runs a chain of shops. We want to open some of our stores in Ludhiana, Amritsar, Delhi and Mumbai. On the other hand, Indian polyester plants are much more competitive. We should be able to buy power equipment from India. If we need PETCO, which is petroleum coal, not natural coal, we should be able to get it from Gujarat. So far we have been getting it from Houston.”

Including China and its wisdom

Pakistan needs to open up to India and heed the Chinese advice to open the trade route called CPEC to India, which remains China’s largest trading partner in the region. Trade will flourish only after certain steps have been taken. Above all, the movement of investors and exporters has to be made easy. The people have to be allowed to move across the border through an easy visa system so that mutual confidence is established. After that, the infrastructure has to be built and new roads laid to facilitate movement of goods. Today’s world is the world of pipelines. South Asia, being short on energy, must think of becoming interdependent on the basis of extra-regional gas pipelines. This means that while consolidating itself as a trading bloc the region must establish effective links with the neighboring regions like Southeast Asia and Central Asia. Bangladesh and Pakistan have therefore become crucial regional states in this connection and both are conscious of the importance of their “middle state” status.

Impediments developed in the past mostly because the idea of free trade appeared before the political scene for it was set. Now, more than ever before, the economist has a voice that convinces with its argument. For once, the crisis of a rising population with poor prospects of sustainability is looming for all types of rulers in South Asia. The South Asian market or bloc is now the need of the hour and can be postponed only at the risk of unavoidable economic decline.

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