Pakistan and India have entered into mutual arrangement for cross-border movement of trucks transporting import and export cargo through Wagha. First Indian truck carrying import cargo crossed the border on October 1, 2007 under this arrangement.

Previously cargo was carried across the borders by the porters on their backs. This switch over of cargo transportation from porters’ backs to trucks may be considered a step forward for raising bilateral trade, which is presently very low as compared with its potential.

The improvement of trade relations between the two countries is justified for the following reasons:

South Asia is the least-integrated region as compared to other regional trading blocs. Improvement in economic relations between India and Pakistan is the key element of regional integration in South Asia. The success of South Asian Free Trade Area (SAFTA) depends on good economic relations between these two major countries.

There exists untapped trade potential between the two countries which if adequately exploited can yield significant welfare gains for them. Moreover, economies of proximity and common border can result in substantial increase in trade benefiting the people of both the countries.

Another key reason for trade between these countries is the past pattern of trade in agricultural items to overcome short-term fluctuations in supply. Pakistan and India have traded in primary agricultural commodities like potatoes, onions and sugar etc. to overcome supply shortages caused due to seasonal crop fluctuations.

In 2003 Pakistan exported chickpeas as she had a bumper crop of chickpeas in that year. The other major exports from Pakistan include dry dates, mulathi / anardana, herbs and rock salt. Pakistan is importing items like betel leaves, fresh garlic, potatoes, tomatoes, fresh green chilli and fresh / frozen and chilled meat.

This pattern of trade points to two important conclusions: first, the pattern of trade between these two countries is demand based and secondly consumer and food items are dominant among the traded products from both-- India and Pakistan.

Experts argue that though the formal trade is marginal, the quantum of informal trade taking place through porous Indo–Pakistan land borders and free ports of Dubai and Singapore is very high. This unaccounted for trade will be directed to legal channels..

Studies conducted on Pakistan–India trade have identified a number of potential items of trade. . According to these studies, import of steel from India will benefit the engineering goods sector. Chemicals and pharmaceuticals used as basic raw materials by industrial consumers have also been identified as potential items of Imports. These raw materials will help in reducing the input cost and making these industries more competitive in the global market. India has comparative advantage in certain specialised areas of healthcare and liberalisation of trade may benefit our health sector.

Similarly, Pakistan may explore opportunities of exports to India in sectors like textile and textile articles, prepared food stuffs, leather, mineral products, plastics and cement etc.

Pakistan has been trading with India on the basis of positive list. The number of tradable items has registered a progressive and gradual increase in the recent years.

Based on information gathered from import policy orders issued by the ministry of commerce for the period between 1995-2006, it is observed that list of importable items has substantially increased in the past two years. As many 328 items were importable from India in 1995, whereas the list was expanded to 687 items in 2004. But in 2006, the list of tradable items increased to 1075.

Even if there is a substantial increase in the importable items from India, India has been insisting on trade with Pakistan on MFN basis. Certain arguments are advanced by the analysists of regional trade for not trading with India on MFN basis.

It is said that political relations between the two countries are not stable. Political, historical and cultural differences are deep rooted and Kashmir dispute is a big stumbling bloc to normalisation of relations between them. As long as Kashmir dispute is not resolved, trust deficit between these two counties cannot be bridged.

If lasting solution of the dispute like Kashmir is not sought, trade ties even if improved will not be stable. Political strain in the relations will also adversely affect the trade relations. In such a scenario, trade relations are not likely to improve on sustained basis.

‘Infant industry argument’ is also used against trade on MFN basis. It is argued that opening up of Pakistani market for Indian goods will hurt the domestic manufacturing sector as Indian manufacturing sector is comparatively more diversified.

Cheap Indian goods will flood Pakistani markets and our manufacturers and producers will not be able to compete with Indian counterparts due to price differential.

These fears are strengthened due to the fact that Pakistan has not been able to capture substantial market share in India. Pakistan’s trade imbalance with India has persistently increased as evident from the following tabulated data. This situation calls for a cautions approach to be followed regarding opening up trade with India.

It is, however, acknowledged that there is no royal road to improved trade relations between the two countries due to their past experience and deep-rooted political and historical differences. India has a large number of barriers to trade. If she does not take reasonable steps to remove these barriers, trade between these two countries cannot be enhanced.

Major non-tariff barriers imposed by India include requirement of political or security clearance, requirements of technical / standard certification, labeling and marking rules, packaging rules specifications, unnecessary and multiple queries on bills of entry on Pakistani exports, separate tariff and Federal Excise Tax schedules, extensive documentation for Customs Valuation and multiple set of rules for inter-state movement of goods etc.

In order to improve trade relations, India should take bold steps to remove non-tariff barriers.

Visa restrictions need to be further relaxed. India needs to take steps to decrease transaction costs by improving its customs clearance procedures as efficient customs procedures can substantially reduce the transaction costs. Hummels (2001) found that the delay of one day in delivering goods from the exporter to the final market on average increases the cost of landed goods by 0.8 per cent.

An institutional arrangement for payments clearances is also a pre-requisite for increasing trade. Indian banks normally do not recognise letters of credit from Pakistani banks and confirmation of LCs can take up to a period of one month.

Some times payments are delayed as banks point out discrepancies in the LCs. So it is required that problems being faced by Pakistani exporters should adequately be addressed by the government of India.