Revisiting MFN status
AFTER years of hesitation, Pakistan has rushed headlong into granting MFN status to India, without robust prior consultation or study. While the economic logic of trade amongst neighbours is irrefutable in the long run, Pakistan should follow its own interests rather than the dictates of externally driven policies.
A critical examination of the MFN merits and demerits — purely in terms of timing as well as prior preparation and not the underlying rationale — suggests that Pakistan should draw out the process to final MFN status well beyond February 2012 to not only prepare domestic industry, but to extract greater facilitation for its exports to India.
Amongst the list of numerous Providence-provided opportunities Pakistan has not availed throughout its history, deeper economic engagement with two of the most populous and fast-growing economies of the world in its immediate neighbourhood would surely rank very high.
The economic rationale of bilateral as well as regional trade is indisputable. Beyond a bilateral prism, reducing Pakistan-India tensions can unlock the economic potential of the entire South Asia region through the invigoration of the moribund South Asian Free Trade Area (Safta).
In theory, the potential impact on Pakistan of freer regional trade would work via the following channels:
— Availability of cheaper raw materials and intermediate goods to segments of Pakistani industry.
— Pakistani consumers are likely to benefit from cheaper final goods.
— Potentially, a large market next door will open up for Pakistani exports.
— Greater competition from low-cost Indian imports for many Pakistani producers.
— Government revenue from import duties will rise, though the net effect on the exchequer is less certain after accounting for the potential fall in tax revenue from the displacement of domestic producers.
Economic theory apart, however, a cold and uncomforting reality is revealed by the data. While ‘gravity theory’ in trade suggests that Pakistani exports should have a large market in India, trade data reveals that Pakistan’s exports have made limited headway in the growing Indian market — even 16 years after India granted MFN status to Pakistan.
Hence, since 1996, Pakistan’s exports to India have failed to breach a paltry $300m, or 1.2 per cent of Pakistan’s exports and 0.09 per cent of total Indian imports in 2011. This despite the competitiveness edge provided to Pakistan’s exports to India by the large exchange rate differential between the currencies of the two countries. Over the same period, India’s exports to Pakistan have risen substantially to $1.5bn — or nearly four per cent of Pakistan’s imports — despite the fact that Pakistan had not granted MFN status to India.
The foregoing suggests the operation of deep-rooted constraints to Pakistan’s exports to India. That this is so is confirmed by a host of international observers and bodies, including the IMF. The World Trade Organisation’s Trade Policy Reviews for India regularly cite the systemic use of a host of potent non-tariff barriers (NTBs) to restrict imports. The Heritage Foundation’s Index of Economic Freedom docks India a full 20 points on trade freedom, the maximum penalty, for pervasive use of trade restrictive practices, versus 15 points for Pakistan. The Indian argument that its trade-restrictive practices are non-discriminatory and not specifically aimed at Pakistan should be of little consequence to Pakistani negotiators, whose principal task is to gain benefits for Pakistani producers — not facilitating Indian exports.
Two specific examples of the pervasive trade-restrictive regime adopted by India: export samples are required to be sent to any number of ‘standards testing’ laboratories across India, with an uncertain wait for the results. A Pakistani garments exporter was recently asked to send his samples to Pune, Chennai and a third city across the length of India, adding to costs and uncertainty. In addition, a frequent complaint of Pakistani exporters is that their containers are routinely opened while it is raining in Mumbai (to which the Indians respond that all containers are routinely opened in the rain in Mumbai!).
To be able to fully exploit the potential of the MFN move, at the very least, three concessions should be drawn from India before further progress is made:
— The complete opening of land routes between the two countries.
— The provision of transport infrastructure on the Indian side, such as railways wagons etc.
— Opening of more Pakistan-specific standards testing laboratories to ease the constraint facing our exporters.
Hinging the MFN status to India’s waiver of its objections to enhanced market access for Pakistan to the EU is folly on a number of counts. First, India’s waiver does not guarantee that the EU package will get through. Second, the EU package to Pakistan is for a limited period, and is estimated by industry sources to amount to approximately $300m a year, at best. In exchange, Pakistan has granted incremental exports of several billion US dollars a year to India (by one influential Indian estimate, exports from India to Pakistan could amount to approximately over $9bn a year post-MFN).
Reinforcing the argument for greater deliberation and pause in the grant of MFN status to India is the fact that this may not be the most opportune time for Pakistani businesses to open up to greater competition. Debilitating energy shortages have seriously eroded the competitiveness of domestic firms, while Pakistan’s balance of payments is already coming under increasing strain. After demurring for 16 years, surely Pakistani policymakers could have waited for better conditions for domestic firms before implementing a whole scale policy reversal?
As a sine qua non, a deeper study of ‘winners and losers’ in domestic industry should be conducted, and a comprehensive policy formulated to mitigate the effects of possible disruptions to investment and employment.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.