debottam
FULL MEMBER
New Recruit
- Joined
- Mar 29, 2011
- Messages
- 40
- Reaction score
- 0
- Country
- Location
I have been watching discussions in Pakistani media (via Youtube) about the current debate over MFN status to India for some time. The logic usually put forward is that there are certain commodities over which Pakistan has a comparative advantage. If the huge Indian market is opened and non-tariff barriers are removed then Pakistan can make huge profits by exporting these commodities to India. Now whenever the uncomfortable question arises about those goods over which India has a comparative advantage and what will happen to Pakistani producers if the market is opened for them, the typical response is - "Oh we will put them in the negative list."
It seems that the promoters for free trade from the Pakistani side are missing an important point, that India might have some reservations about such an arrangement where India opens its market for Pakistani goods but Pakistan doesn't.
Right now there are significant non-tariff barriers on the Indian side but the Indian market is mostly open. From Pakistan's side it's largely closed. The total volume of trade is small, 2.7 billion dollars. Indian exports are close to 2 billion dollars and Pakistani exports are about 700 million dollars. Notice that Pakistan has a substantial trade deficit despite blocking most Indian products. Apart from the legal routes a huge volume is smuggled either via Afghanistan, Singapore or Dubai. The volume of this illegal trade is estimated to be quite high, about 2 billion dollars and it's almost completely one way; from India to Pakistan. Illegal trade patterns are a very good indicator of latent trade potentials and patterns.
Scenario 1 - All trade barriers are removed from both sides:- Total volume of trade explodes. But given the current trade (formal/informal) patterns it's fairly obvious that if all trade barriers are removed, Indian exports will dwarf Pakistani exports. It's not necessarily a bad thing. A few thousand Pakistanis may lose their jobs due to competition but millions of others will hugely benefit from cheaper Indian goods. After all Indian goods can replace Pakistani goods only if they are cheaper. And the same is true for India as well. But it will be politically unpalatable and given how clueless about economy both countries' policymakers are, complete removal of trade barriers is not gonna happen anytime soon.
Scenario 2 - Both countries remove all non-tariff barriers. India removes remaining tariff/anti-dumping duties almost completely. Pakistan maintains a negative list but gives a reasonable number of Indian goods (particularly those which are not subsidized) access to its market:- Total volume of formal trade increases substantially. Informal trade is reduced. And this combination should be politically acceptable to both countries. However even in this case Pakistan will remain in a large trade deficit with India. Case in point is Bangladesh. India-Bangladesh trade regime is pretty close to what is described here in scenario 2. Yet every year India exports much more than it imports. The reason behind this is that both Pakistan and Bangladesh's economy is structured in a certain way. They export their products to rich countries and import raw materials and consumables from other developing countries like India, China, Malaysia, Thailand etc. Pakistan's largest exports are textile and leather goods which goes to the lucrative US/EU markets. India won't be as profitable. On the other hand India is more efficient than Pakistan in making cheap consumer products which will flood the Pakistani market if allowed in. Case in point - China-Pakistan trade patterns.
In conclusion, trade with India will benefit Pakistan mostly in consumer benefits. A few sectors will lose producer surplus due to competition from Indian goods while another few will gain by exporting to India.
Data sources - World Bank report, Indian economic survey, Pakistani economic survey.
It seems that the promoters for free trade from the Pakistani side are missing an important point, that India might have some reservations about such an arrangement where India opens its market for Pakistani goods but Pakistan doesn't.
Right now there are significant non-tariff barriers on the Indian side but the Indian market is mostly open. From Pakistan's side it's largely closed. The total volume of trade is small, 2.7 billion dollars. Indian exports are close to 2 billion dollars and Pakistani exports are about 700 million dollars. Notice that Pakistan has a substantial trade deficit despite blocking most Indian products. Apart from the legal routes a huge volume is smuggled either via Afghanistan, Singapore or Dubai. The volume of this illegal trade is estimated to be quite high, about 2 billion dollars and it's almost completely one way; from India to Pakistan. Illegal trade patterns are a very good indicator of latent trade potentials and patterns.
Scenario 1 - All trade barriers are removed from both sides:- Total volume of trade explodes. But given the current trade (formal/informal) patterns it's fairly obvious that if all trade barriers are removed, Indian exports will dwarf Pakistani exports. It's not necessarily a bad thing. A few thousand Pakistanis may lose their jobs due to competition but millions of others will hugely benefit from cheaper Indian goods. After all Indian goods can replace Pakistani goods only if they are cheaper. And the same is true for India as well. But it will be politically unpalatable and given how clueless about economy both countries' policymakers are, complete removal of trade barriers is not gonna happen anytime soon.
Scenario 2 - Both countries remove all non-tariff barriers. India removes remaining tariff/anti-dumping duties almost completely. Pakistan maintains a negative list but gives a reasonable number of Indian goods (particularly those which are not subsidized) access to its market:- Total volume of formal trade increases substantially. Informal trade is reduced. And this combination should be politically acceptable to both countries. However even in this case Pakistan will remain in a large trade deficit with India. Case in point is Bangladesh. India-Bangladesh trade regime is pretty close to what is described here in scenario 2. Yet every year India exports much more than it imports. The reason behind this is that both Pakistan and Bangladesh's economy is structured in a certain way. They export their products to rich countries and import raw materials and consumables from other developing countries like India, China, Malaysia, Thailand etc. Pakistan's largest exports are textile and leather goods which goes to the lucrative US/EU markets. India won't be as profitable. On the other hand India is more efficient than Pakistan in making cheap consumer products which will flood the Pakistani market if allowed in. Case in point - China-Pakistan trade patterns.
In conclusion, trade with India will benefit Pakistan mostly in consumer benefits. A few sectors will lose producer surplus due to competition from Indian goods while another few will gain by exporting to India.
Data sources - World Bank report, Indian economic survey, Pakistani economic survey.
