India-Pakistan Trade: A New Hope

by Anubhav Gupta on May 11, 2013

India Pakistan Border GuardsCountries that trade with each other don’t go to war with each other. While this argument has been debunked repeatedly throughout history, many—including the U.S. government—still believe that increasing trade between estranged neighbors and nuclear rivals India and Pakistan will reduce the likelihood of conflict. After witnessing three wars in the twentieth century, a mammoth military standoff in 2002, and countless terrorist attacks and recriminations, the world is eager to pin its hopes on anything that might cool tensions in one of its most volatile regions. Improved trade relations between India and Pakistan may in fact be the solution.

Following a complete breakdown in relations in the wake of the 2008 Mumbai attacks, India and Pakistan reestablished diplomatic ties in early 2011. Relations have improved rapidly ever since, as both governments engaged in diplomatic dialogue publically and behind the scenes. The greatest signs of progress came in November 2011, when Pakistan announced it would grant Most Favored Nation (MFN) status to India, and in September 2012, when the two countries signed a new visa agreement. Although such policy changes have yet to be implemented, the thaw in relations is historic due to its substance and the speed at which it came to fruition. But why now?

Détente has always been in both countries’ best interests, but institutions—the military in Pakistan and electoral politics in India—have repeatedly gotten in the way of greater economic integration. The current situation in each country has opened the door for the two to resolve some of their disputes by developing trust and connections on both sides of the border, as well as by having specific political constituencies push for peace. Trade combines these objectives perfectly.

The events of the past decade have forced politicians in both countries to think beyond competition. Pakistan has lived through a grueling ten years as its economy stagnated and its support for radical militants led to sectarian violence and terrorism at home. India, on the other hand, has seen its fortunes rise steadily because of its robust growth rates, emerging as an economic power with influence on the world stage. Graphical depictions of each country’s trajectory provide an illustration of the sharp contrast between them. To put it simply, India now has global aspirations, and Pakistan has been left behind.

India-Pakistan GDP (1971-2011)

India and Pakistan’s GDP have diverged sharply in the past decade.

India-Pakistan GDP per capita (1991-2011)

India’s per capita GDP has grown at a much faster rate than Pakistan’s since 1991.

Consequently, each country’s priorities and threat perceptions have shifted. India has positively transformed its diplomatic relations with the U.S., while Pakistan’s relationship with the world’s preeminent power has deteriorated. Each government mistrusts the other’s ambitions in Kashmir, dedicating significant military and economic resources to the border region, but Indian strategic thinkers now see China as their most pressing strategic problem. Additionally, both countries remain concerned about economic development, but Pakistan has only recently realized that continued instability is deleterious to that goal. The recent thaw in relations suggests that the two governments understand that they can no longer forgo stronger economic ties.

Estimated at just $2.6 billion in 2011, trade between India and Pakistan is atrociously low given the cultural similarities between the neighbors and the history of economic activity in the region. The figure appears even lower when compared to India’s trade with China, which may soon surpass $100 billion. Studies have projected that moving immediately to free trade between India and Pakistan could triple the amount of commerce to as high as $8 billion by 2015. If restrictions are removed and trade between India and Pakistan is allowed to flourish, larger constituencies for peace would automatically develop. Thousands of workers, entrepreneurs, and companies that reap the benefits of trade would pressure politicians to maintain healthy bilateral relations. Such a constituency has already started to develop in the Punjab, where leaders of both the Indian state and the adjacent Pakistani province of the same name have called for greater trade as the key to creating a sustainable peace.

Despite improved bilateral relations in the past two years, significant roadblocks persist. Politics and unnecessary border skirmishes have interfered with progress, and major economic policy changes have repeatedly been delayed. Trade reform will undergo additional review by the new civilian government that comes to power after today’s elections in Pakistan. It is widely believed that both countries are waiting for the other to make concessions, but neither has been willing to take the first step thus far. Business interests in both countries are pushing to change that, and the international community should also voice its support.

Once the Pakistani election results are in, the two governments should make trade a top priority, implementing mutual steps to maximize political cover. Pakistan’s parliament should stop stalling and officially approve India’s MFN status as well as the bilateral visa agreement. Meanwhile, India should take steps to simplify its trade rules and tariffs, especially on key Pakistani export industries like textiles and agriculture. In the end, bold political leadership will be necessary to jump start trade. This would have enormous economic benefits for both countries, but, more importantly, the promise of a booming trade relationship could finally put a lasting peace within reach.

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