Pulwama and trade war

A climate of hate is emerging in India after the Pulwama attack. The targets are varied and apparently unconnected. One of the things that has happened is that India has suspended the MFN status given to Pakistan, slapping a 200 percent duty on its products. This means that Pakistani goods will become dearer in Indian market, as compared to other countries, and will tend to lose their share of exports in the future. This discrimination in trade will obviously economically hurt the numerous export orders lined up at the border that have been stopped and cancelled arbitrarily.

Pakistan had not granted MFN status to India, mainly under political pressure, and trade was proceeding lethargically on the basis of the positive (permitted goods) and negative list (prohibited goods) approach. However, after India’s decision of revoking the MFN, Pakistan is evaluating to expand the negative list, in a tit-for-tat response, under which import from India will be immediately curtailed.

Nevertheless, it is not the first time trade has become hostage to a security crisis. Both countries have a troubled track record due to political and armed conflicts since their inception as independent states. Trade was visibly disrupted first in 1949 and then suspended during the wars of 1965, 1971 and Kargil in 1999. It has suffered in the aftermath of the attack on the Indian parliament in 2002, Mumbai attack of 2006, Wagah attack in 2014, and now the Pulwama attack. Trade has borne the brunt of growing Indo-Pak rivalry, which hindered serious strides in growth and human development of the two major regions of South Asia.

Despite being members of Saarc and Safta, potential value of trade could not takeoff beyond $2billion annually due to presence of non tariff barriers and presence of sensitive lists on both sides. However, the Trade Dialogue Rounds of Talks on Economic and Commercial Cooperation held from 2004 to 2012 was a watershed moment. This was the time when Pakistan switched over from a positive list of 1900 items to a negative list of 1209 items, allowing some 5600 items to be freely traded that were previously banned. There were talks on trade through third countries to discourage smuggling, and removal of tariff and non-tariff barriers. In the same year, visa policies were also relaxed by both governments and frequent exchange of dignitaries and businessmen followed.

A mutual agreement for customs cooperation was signed, which led to the creation of the Customs Liaison Border Committee (CLBC) in 2011, a bilateral institutional mechanism at the Wagah-Attari border aimed to reduce non-tariff barriers hindering trade. Under this arrangement, customs officials of both countries had met alternately in Lahore and Amritsar to resolve operational issues. Frequent meetings generated good will besides smoothening business process, simplification of documents, lodging trade grievances, and facilitation of passengers, exchanging trade data and information, expeditious clearance of cargo and controlling contraband goods.

No sooner did the Modi government take power, the existence of the CLBC was aborted and with it the institutionalised bilateral mechanism of trade facilitation came to an end. Suspending the MFN status is another conspicuous blow to trade relations under the Modi regime.

Forging a trade war reflects a knee-jerk reaction of a belligerent neighbour. It is also not justifiable under the WTO in the presence of trade remedy laws. India may have chosen to restrict temporarily Pakistan’s export to India on economic and security grounds. For example, in case of material injury to domestic industry, India may apply antidumping duties under Article VI of GATT or invoke safeguard provisions under Article XIX of GATT to protect domestic producers from the economic threat of products from Pakistan. National security exceptions recognised under Article XXI of GATT also justify imposition of trade restrictions on a selective basis. Once it has been granted to a country, revoking the MFN is not the desirable option under law.

Trade disruption will obviously accentuate existing border tax distortions, further escalate imposition of non-tariff barriers, stifle the current visa prospects, and fuel the gnawing trust deficit between regional neighbours. As compared to Pakistan, India tends to lose more in revenue as imports from India are at $1.8billion and exports from Pakistan are at $350million. Pakistan’s economic loss may be offset by emerging prospects of trade with China, a much reliable economic partner, as both are set to sign the FTA II, wherein China has announced a three-time increase in imports from Pakistan, beside allowing the export of one million ton each of rice and sugar from Pakistan. CPEC, another low hanging fruit, is a matter of time.

Pakistan still has some valuable cards to play but it is unfortunate that, while Pakistan firms up one relationship, others are crumbling. Sanity should prevail from across the border.

The writer holds an LLM degree ininternational economic law from the

University of Warwick.

Email: beelam_ramzan@yahoo.com