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The Trade-Shy State

by Khaled Ahmed

File photo. Rouf Bhat—AFP

Pakistan must adopt a pragmatic view toward trade if it desires economic progress

Pakistan is not exactly at war with India but the bilateral hostility is so intense that the two abstain from bilateral trade. In the region of South Asia, foreign exchange reserves—related fundamentally to trade—signal a criterion that can’t be ignored. Look at the figures of foreign exchange reserves in the region as of August 2021: Sri Lanka $3.2 billion; Bangladesh $44.6 billion; Pakistan: $27 billion; and India over $600 billion. (Note: Pakistan’s reserves are mostly “borrowed dollars” provided by the IMF’s oxygen-tent and through the largesse of allied states such as China and Saudi Arabia.)

Wars don’t end trade

Why is India trading with all its neighbors except Pakistan? The reason is Pakistan’s “Kashmir” dispute with India over which the two have fought many open and secret wars. India’s final annexation of the disputed Jammu and Kashmir through a constitutional amendment has sharpened bilateral hostility and no one in Pakistan now thinks of trading with India. But one may ask the awkward question: why are India’s other neighbors continuing their trade with Delhi despite their own bilateral disputes?

India and China have fought only one war, in 1962, when Delhi suffered a humiliating defeat. Simmering border tensions since then carry the risk of escalation, which can be devastating given that both sides are established nuclear powers. Recent military stand-offs, during which the Indian army was humiliated, should have damaged bilateral trade but they have not. The year 2020 was particularly violent. The June clash in the Galwan Valley—fought with sticks and clubs, not guns—was the first fatal confrontation between the two sides since 1975.

‘Enemy trade’

But India’s trade with China is set to cross the $100 billion mark for the first time in 2021, with shipments hitting $90 billion in just three quarters, an almost 30 percent jump from pre-pandemic levels. Data from China’s customs showed two-way trade jumped 49 percent to $90.37 billion in the first nine months of the year. India’s imports from China surged 51.7 percent to $68.4 billion, while India’s exports rose 42.5 percent to $21.9 billion.

It is not only India which behaves pragmatically when it comes to trading with China. China’s trade surplus with the U.S., a source of trade tensions between the world’s two largest economies, has risen to $325 billion. The great U.S.-China battle-in-the-offing in the Indo-Pacific through AUKUS [the United States, United Kingdom and Australia], includes India as an ally but that doesn’t mean that the members of AUKUS will stop trading with China.


So how is India faring with other states in the region? In December 2020, India and Bangladesh held a virtual summit where they discussed topics like boosting trade, investment and transportation links. Did it mean they had no disputes to serve as roadblock? Not especially; both countries avoided the thorny issue of sharing the water of the Teesta River, which flows into Bangladesh from the Indian states of Sikkim and West Bengal. Teesta is Bangladesh’s lifeline and it can actually go to war for it.

Bangladesh has tended to “balance” its substantial trade equation with China but its trade with India is not negligible. It has actually surpassed Hong Kong to become India’s fourth largest export destination in the first three months of 2021, climbing four notches to figure as India’s s top five export destinations in 2020-21. “India’s exports to Bangladesh rose 46 percent on an annualized basis at $3.16 billion in January-March, securing it the fourth position after the U.S. ($15.41 billion), China ($5.92 billion) and U.A.E. ($5.34 billion), according to the latest data from the commerce ministry. Indian merchandise exports to Bangladesh, which saw a 35.14 percent year-on-year growth to $0.95 billion in January and 17 percent to $0.94 billion in February, witnessed a 93.45 percent annualized jump in March to $1.26 billion.”

Indo-Pak trade and/or politics?

For India and Pakistan though, trade is linked to politics. India’s exports to Pakistan fell around 16 percent to $1.82 billion in 2016-17 from $2.17 billion in 2015-16 after relations deteriorated in the aftermath of the “Uri terror attack” and the Indian Army’s “surgical strikes” in Pakistan-administered Kashmir in 2016. Bilateral trade between the two countries grew marginally in subsequent years. Indian exports rose nearly 6 percent to $1.92 billion in 2017-18, and then by around 7 percent to $2.07 billion in 2018-19. Imports from Pakistan, though much less in volume, also increased by 7.5 percent to $488.56 million in 2017-18 from $454.49 million in 2016-17.

Because of the Indo-Pak trade shutdown, affordable medicine in Pakistan is not possible, as imports from the U.S. become too expensive with the current collapse of the Pakistani rupee. Add to that a number of commodities that Pakistan can afford to import only from India and you have a situation of relative “preference” to expensive imports from the West and China.

(Note: Pakistan halted trade and diplomatic ties with India in 2019 after New Delhi imposed direct rule on the part of Kashmir it administers and imposed strict security controls there in anticipation of unrest at the decision.)

India-Sri Lanka trade

Trade between India and Sri Lanka has shrunk after their bilateral relationship dipped owing to a civil war-like crisis inside Sri Lanka because of the country’s Tamil minority. An Indian prime minister, Rajiv Gandhi, was actually assassinated by a Tamil in India when he tried to “normalize” with Sri Lanka. Like Bangladesh, Sri Lanka invited China in to “balance” the big neighbor. India, however, remains Sri Lanka’s largest trading partner with a share of 16 percent in Colombo’s total trade with the world. A major shift in recent years is a large improvement in the share of China in Sri Lanka’s total trade from 5 percent in 2007 to 14 percent in 2017.

Pakistan was supposed to become like India—as far as trade goes, anyway—if it wanted to survive. Former Indian foreign minister Yashwant Sinha used to point out that India fought its war with China in 1962 and still had territorial disputes with it; yet, China remained India’s largest trading partner. Today Sinha is no longer a part of the Bharatiya Janata Party that currently rules India.

SAFTA and groove of nationalism

Pakistan refuses to budge from its revisionist track. This revisionism has become an integral part of its nationalism through which it judges the world. It keeps on fighting sub-nuclear wars with India and hurting its own economy. It has disputes with India, but so has Bangladesh without taking on the big neighbor through deniable anti-status quo adventures. With the advent of BJP on the scene, and India’s vast economic ability to challenge Pakistan without hurting itself, it is time for Islamabad to reflect.

The desire for a trading bloc called SAFTA [South Asian Free Trade Area] is not an idle dream. It is enshrined in the charter of the South Asian Association of Regional Cooperation (SAARC) established in 1985. Because of conflict in the region, it has taken a long time implementing the trade-related agreements signed under SAARC. Diplomats, harried by disputes, have called SAARC a “futuristic” organization whose conception was not realistic.

Yet, there is no doubt about the wisdom—which is another name for strategic flexibility—of seeking peace with neighbors. India is recalcitrant when it comes to resolving disputes; but it doesn’t switch off trade. No army wants a multi-front situation. An economically pressured Pakistan simply can’t afford to have its fronts heating up east and west while there is economic emergency within. This has even been supported by Chief of Army Staff Gen. Qamar Javed Bajwa, who in March 2021 noted it was time for Pakistan and India to “bury the past and move forward” to achieve regional progress.

In the eyes of the world, Pakistan must take the initiative because the world rightly or wrongly thinks that Pakistan as a “revisionist” state relies on covert cross-border attacks. There are no takers for Pakistan’s explication of the disastrous Kargil Operation of 1999. Let the dispute simmer but allow bilateral trade that can help defuse some of the intensity with which India acts inside Kashmir.

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