INDIA’S decision to withdraw the Most Favoured Nation (MFN) status from Pakistan, by foisting a ‘Pulwama tariff’ of 200 per cent on its exports, is the biggest blow yet to the efforts to improve the bilateral trade relationship.

The decision, taken in the aftermath of a terror attack that killed over 40 Indian soldiers in Pulwama in India-held Kashmir, also underscores the fact that the bilateral trade ties between the two largest South Asian economies have always been a by-product of the political relations between them.

This is a reality that is likely to continue to determine the quality and size of economic cooperation between the two nuclear nations for a very long time to come. The Indian decision, therefore, has surprised few on this side of the border.

India and Pakistan have a great potential to boost trade but the long-standing dispute over Kashmir is holding them back from using regional trade to significantly increase their economic growth and reduce poverty, as has been done in many other parts of the world.

A study by the World Bank released last year claimed that bilateral trade between the two nuclear countries could increase to $37 billion from less than $2.5bn last year.

The good news is that Islamabad has resisted the temptation to retaliate in kind in spite of a few muted calls. Any step to raise import tariffs will only spike the cost of production and consumer prices here

The tense relationship between Islamabad and New Delhi is also blocking progress on regional trade agreements, signed under the banner of the South Asian Association for Regional Cooperation (Saarc), to boost free trade in the region that houses the largest number of poor in the world.

Although India announced the MFN status for Islamabad in 1996, a year after the World Trade Organisation (WTO) was born from the General Agreement on Tariffs and Trade, Pakistan has always found it difficult to directly and indirectly sell and market its products there because of political and other non-tariff barriers.

Politically, there have been instances in which some extremist Indian groups forced the removal of products with ‘Made in Pakistan’ labels, being marketed by international brands, from shops. Similarly, many Pakistani exporters gave up efforts to ship their products to India because of the so-called quality standards that were hard to meet.

India claimed these quality standards were not Pakistan-specific and hence refused to ease them even as a goodwill gesture. Little wonder that Pakistan’s shipments to India remain very narrow, fetching $488 million in export revenues against imports of around $1.8bn last year.

Pakistan too has contributed towards keeping the bilateral trade volume quite lot below its potential by refusing to grant MFN status to India. Two years ago, the import of fresh vegetables and fruit was also banned on ‘disease concerns’. Besides, Pakistan allows only a very small number of items that can be traded through the Wagah-Atari surface route. Many products can be traded only through train.

However, the two countries made substantial progress in 2012 when Islamabad replaced the ‘positive list’ of items that could be traded with India with a ‘negative list’ of products that could not be. That was a big step towards increasing trade engagement between the two neighbouring countries.

Islamabad also agreed to later give Non-Discriminatory Market Access (NDMA) status to India in place of MFN but no action was taken because of fear of political backlash at home.

As a consequence of the trade barriers erected on both sides of the border, many find it more convenient to import and export through a third country, mostly via Dubai and Singapore. The trade volume via third country is estimated by many to be in the range of $2-5bn.

Interestingly, neither of the two countries has ever approached the WTO in the past against trade roadblocks created against each other. So Pakistan is unlikely to move the global trade facilitator against the ‘Pulwama tariffs’.

There will be implications of the extreme step taken by the Modi government which has accused a banned Pakistan-based group, Jaish-e-Mohammad, for the most recent terror attack on its soldiers.

First, the increase in tariffs has already closed the Indian doors on Pakistani cement, gypsum and dried dates. While this is a setback for local exporters, the Indian consumers of these items will also have to bear the consequences.

Second, the action is feared to divert trade to third countries and illegal channels.

Third, and most important, it may take the two countries a very long time to reverse the impact of this knee jerk reaction by New Delhi as extremist, anti-Pakistan groups are likely to resist any move to restore the MFN tariffs.

Pakistan has denied any kind of involvement, offered to investigate the attack if India provides actionable intelligence and promised action against those found using its soil to attack another country. Islamabad says the Pulwama attack was conceived, planned and executed indigenously.

The good news so far is that Islamabad has resisted the temptation to retaliate in kind in spite of some muted calls from certain business and other groups.

For Pakistan, 75-80pc imports from India comprise of raw materials — cotton and PSF yarn, chemicals, ingredients for pharmaceuticals and so on. Any step to raise import tariffs will only spike the cost of production and consumer prices here.

In the meanwhile most people in Pakistan will keep their fingers crossed, hoping that better sense will prevail and movement — no matter how slow — towards a free trade region in South Asia will continue.

Published in Dawn, The Business and Finance Weekly, February 25th, 2019