India-Pakistan Ties: If Goods Don’t Cross Borders, Soldiers Will

Resuming trade talks can help India-Pakistan attain a trade potential of $20 bn, writes Afaq Hussain and Riya Sinha.

Prime Minister Narendra Modi’s recent meeting with Pakistan’s Prime Minister Nawaz Sharif on the sidelines of the Paris summit followed by Sushma Swaraj’s visit to Pakistan has raised hopes about the possibility of resumption of the bilateral composite dialogue. The move signals a long-awaited thaw in bilateral relationship.

International commerce is the single most effective area that can successfully alter the bilateral foreign policy of India and Pakistan and enable them to move beyond their strained political linkages. Both conventional wisdom and empirical evidence propose that increasing levels of cross-border economic flows, defined either in terms of trade or capital movements decreases the probability of conflict.

Deliberating the very notions of peace through trade or trade through peace, can be quite intriguing. Reducing conflict helps create a globally conducive atmosphere for facilitating trade and other ties between countries; at the same time, increasing trade promotes peace through communication and transnational ties, which improves mutual understanding among societies and raises the potential for cooperation. The growing internationalisation of commerce and firms makes war less likely by increasing the costs of severing economic links.

Focus On Bilateral Trade

Trade through peace has worked exemplarily well for several countries, especially after World War II. Trade can be instrumental in achieving and maintaining peace and stability, even between arch rivals like India and Pakistan. The cost of economic conflict, against the cost of decreased conflict and increased economic ties, makes the latter choice obvious.

The bilateral trade between India and Pakistan stands at less than $3 billion; which is low but has been growing over the last few years, despite instances of conflicts and ceasefire violations. In an era of globalised economies, increasing bilateral trade between India and Pakistan would raise mutual economic benefits while discouraging cross-border terrorism and violence.

Economic Engagement

• Instead of heavy spending on military and arms, potential on trade front can be tapped as a confidence building measure
  
• Shutting down trade completely not good for India and Pakistan since both have volatile markets with uncertainties like inflation and slow growth
  
• People-to-people interaction can act as a buffer in an atmosphere of mistrust and pave way for enhanced economic cooperation
  
• Pakistan granting India the Most Favoured Nation status will expand trade basket with 1209 items being struck off from the negative list
  

Trade and Investment Potential

Numerous economic and welfare gains can be realised under the largely untapped trade and investment potential shared by the two countries. Being contiguous, bilateral trade can substantially reduce trade costs and enable India and Pakistan to reach the estimated trade potential of $20 billion.

Choosing not to trade, however, may bring about many disadvantages; both economies face uncertainties like inflation, slow growth, loss of Foreign Direct Investment (FDI) and the fear of conflict, which make their markets more volatile. Such risk is best avoided by both countries as the loss of investment, jobs and ultimately GDP, will have devastating consequences that are likely to raise security problems. For example, non-cooperation in the energy sector, by hindering the proposed energy pipeline from Central Asia to India can cost Pakistan $ 500 million annually in transit charges while limiting its energy needs.

Long-term peace would necessitate creating stakes for both countries to push economic co-operation. De-linking trade from the political complexities of both countries can assist in reducing the number of conflicts, and acting as a catalyst for the prosperity of people on both sides.

Resuming Dialogue Crucial

To reduce the economic cost of conflict between India and Pakistan and to make the resumption of dialogue successful, some concrete measures need to be undertaken.

Bilateral trade dialogue needs to resume on an urgent basis, this will not only open new trade opportunities but will also act as a ‘signaling mechanism’ for buying peace. Track I dialogue needs to be complimented by Track II dialogue, involving more stakeholders involved in conducting economic activities between the two nations.

Expanding people-to-people contact is a prerequisite to debunk the myths and prejudices that have fostered mistrust in this region. Educational exchanges, cultural events, religious pilgrimages, and sporting events proffer much scope for interaction. The agreement, during the Shanghai Cooperation Organisation (SCO) summit in July 2015, to develop a mechanism of facilitating bilateral religious tourism was a welcome step; however, these agreements can only reap benefits if there is suitable implementation. Greater connectivity and contact is needed at the ground level, where trade and business is actually conducted. There is a need to promote engagement amongst businessmen, small and medium enterprises, and women and youth entrepreneurs.

Initiation of LoC Trade

Reviving the much neglected barter trade across the Line of Control (LoC), the de facto border between India and Pakistan, is extremely important as well. Till date, the initiation of LoC trade, across the two sides of Kashmir, has been the single most important confidence building measure between the two countries.

Expected to enhance economic cooperation between the two sides of Kashmir, and eventually between India and Pakistan, this trade did serve its purpose initially. Over the last few years, however, its benefits seem to have been clouded by other ‘considerations’. It is of utmost importance that the two governments look into the revival of cross-LoC trade as this could exemplify the stance of gaining peace, by increasing prosperity in the Valley and engaging youth constructively, through trade; this would mitigate the long drawn-out conflict in the Kashmir region.

Granting MFN Status

Pakistan granting India a Most Favored Nation (MFN) status would be another highly decisive step in improving cross-border trade; the current negative list of 1209 items would be done away with, the trade basket would expand, trade facilitation measures like infrastructure, institutions, services, policies, procedures, and market-oriented regulatory systems, would improve. Such measures would decrease the trade cost and subsequently lower prices for millions of consumers on both sides, paving way for quality products with a competitive edge in both markets.

Trading under an economically unconducive environment has cost India and Pakistan significantly. It is high time that governments on both sides increase economic engagement in a way that reduces conflict and earns peace by extinguishing unscrupulous political interests that benefit from conflict, while promoting the interests of ground-level stakeholders.

[Afaq Hussain is Director and Riya Sinha is Research Assistant at Bureau of Research on Industry and Economic Fundamentals (BRIEF), New Delhi. Views expressed are personal]