PAKISTAN’S relationship with India has a long his­tory of volatility, but trade ties took a nosedive after 2019. The Pulwama attack escalated tensions, followed by India’s revocation of held Jammu and Kash­mir’s special status in August.

These events strangled formal trade relations. India imposed a hefty + on Pakistani imports and suspended trade across the Line of Control. Pakistan retaliated with a trade ban, later allowing only essential pharmaceutical imports.

However, recent developments suggest a potential thaw. After being elected this year, the prime ministers of both countries excha­nged succinct congratulatory messages on the social media site X (formerly Twitter). More tellingly, Deputy Pri­me Minister Ishaq Dar has recently advocated normalising relations with India.

Smuggled cattle on Eid

The sheer volume of informal trade and smuggling between the two countries underscores the potential benefits of normalised trade.

Estimates suggest billions of dollars flow between the two countries through smuggling and rerouting via Dubai and other hubs.

Billions flowing between both nations through smuggling and ‘rerouting’ underscore potential benefits of normalising trade relations

Shabbar Zaidi, a former Federal Board of Revenue chairman, estimates smuggling alone is worth $1.5-$2 billion annually, with Dubai adding another billion dollars. This amount is relatively modest compared to an estimate by a study by the Indian Council for Research on Inter­national Economic Rela­tions that pegged informal trade at $4.71bn in 2016.

Payments for this informal trade are often made through hundi/hawala channels, with border security forces potentially involved, asserts Mr Zaidi. “Thou­sands of cows and other livestock moved across the border before Eidul Azha,” he says, alongside illicit trade in betel nut and tobacco products.

From Pakistan’s side, rock salt and dried fruit from Afghanistan are smuggled across the lengthy 3,300km border.

Such a robust informal trade network underscores the potential benefits of normalised trade relations. While political tensions remain, economic logic suggests a path forward for mutual benefit.

Trade beyond disputes

As former Pakistani finance minister Miftah Ismail argues, “All trade is beneficial, and given the countries’ proximity, it is beneficial to both countries. China and Taiwan have a dispute, but their trade is booming; India and China have a dispute, but their trade is flourishing. China and India have skirmishes at the border but trade with one another.”

Despite the threat of invasion, China and Taiwan’s bilateral trade is over $250bn. Similarly, India imported $101bn worth of goods from China in 2023 and exported $16bn in 2023.

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“We are no closer to getting Kashmir back than before the ban,” he says, adding that stopping trade ties with India had not been politically successful. An economically strong Pakistan can represent the wishes and aspirations of the Kashmiri people a lot better in international forums than a weak Pakistan, he argues.

But does opening up trade with India mean Pakistan’s exports will increase?

Anecdotal evidence from various Pakistani traders suggests an innate bias against products labelled ‘Made in Pakistan’ in India. Furthermore, India frequently imposed non-tariff barriers on Pakistan’s exports before the Pulwama attacks. However, this is not the case for all potential exports.

India’s Amritsar has a Majith Mandi with about 400 traders, most of whom used to source dry dates from Pakistan before 2019. Customers who would come to the bazaar to buy dry dates would also buy other stuff, but now the mandi looks like a barren land, and most of the traders have gone out of business, states the report “The Dubai Angled Triangle” by Indian authors Nikita Singla and Priya Arora.

Another example is lawn designer suits. It is not only Pakistani women who demand designer lawn suits. The report states that after the lawn designer collections were launched in the mid-2000s, “the Indian market witnessed an incredible demand for Pakistani suits”. Exports of cotton suits rose from a meagre $4,100 in 2009 to $247,800 in 2015. After the 2019 ban, the supply of Pakistan-made garments was rerouted via Dubai.

Freight cost savings

Other than avenues of exports, imports from India could benefit Pakistani businessmen, argues Almas Hyder, former president of the Lahore Chamber of Commerce and Industry. Using ballpark estimates, Mr Hyder says that about $1bn of $10bn of machinery imports and $1bn of $10bn of raw material imports can be sourced from India.

Machinery imports from India via Dubai are particularly challenging, as highlighted by Dr Manzoor Ahmed, former ambassador to the World Trade Organisation. Not only is it difficult to repack big machinery, but importing parts presents another hurdle. “Bangladesh’s success in part lies in importing majorly from India,” he adds.

Currently, Pakistan spends a significant amount on freight costs. Mr Hyder points out that businesses pay around $3,000 to $4,000 per container for imports from further away. However, importing from India could drastically reduce these costs, bringing them down to $300 to $400 per container.

Given the example of the ill-negotiated Free Trade Agreement with China, which flooded Pakistan’s market and yielded precious few exports in return, Mr Hyder argues that the first step to liberalising trade is to start with negotiations that set tariff and non-tariff barriers in the interest of both countries.

A comprehensive trade agreement with India would encompass crucial elements such as dispute resolution mechanisms, optimal banking channels, and modalities for government-to-government deals versus business-to-business deals.

“The agreement of South Asia Free Trade Area is obsolete; everything needs to be renegotiated,” he says.

Published in Dawn, July 1st, 2024