In the case of SAARC countries our trade within the bloc is miniscule as a percentage of trade that the individual countries undertake with Asia and other parts of the world.
By Amir Ullah Khan
A lot has been written about trade ties between India and Pakistan with opposing views – there are those who think that trade would facilitate cheaper access to goods in both the countries while others believe that India will dominate the sub-continent. It is interesting and revealing to look at trade taking place between the various trading blocs like ASEAN, MERCOSUR and NAFTA. This is done to highlight the fact that geographically close countries in these blocs trade far more than what the countries of South Asia do and this flow has dramatically increased in the last decade with the liberalization of trade being accomplished in the other trade blocs.
Intra-block trade has increased between 1991 and 2009. Though the increase in trade between SAARC countries too has notched an increase of 200 per cent, it starts with the lowest base among the four blocks under consideration. Though the figures reflect the dramatic growth in SAARC countries’ intra-block trade as a percentage of their trade with the world, the figures pale in comparison to the other trade blocks. This also provides us with the proof of the ‘cluster approach’, where within close geographic areas neighbours can trade actively and successfully even while competing in third markets.
The World Trade Organisation (WTO) was set up in January 1995. It was founded on one important principle that countries would not discriminate among members, a practice that abounded in the past. During the Cold War era of the sixties and the seventies, ideological and strategic interests ensured that certain countries were given specific benefits by importing nations through lower tariffs or higher quotas. The WTO then defined that such differences would not exist and that the same favour that was extended to the Most Favoured Nation (MFN) would be extended to all members of the WTO, thereby ending discriminatory practices. All members of the WTO implemented this immediately with some exceptions, and it has taken 16 years for Pakistan to implement this with respect to India. On November 2, 2011, the Pakistan government announced that it was ready to grant the Most Favoured Nation (MFN) status to India.
Large number of estimates state that trade between the two largest economies in South Asia would be at least five times the current level of $2 billion. A large part of this trade happens through Dubai, increasing costs of transportation and time taken for goods to reach their destinations. While India’s tariffs are now far lower at an average of 13 per cent that they used to be two decades ago, they are still high at about 40% for most agricultural goods. And Pakistan’s export interests will be in agriculture, textiles, sporting equipment and leather goods. In addition to these high tariffs which should come down as time goes by, are the excessively poor conditions that exist on both sides of the border through inadequate infrastructure, bureaucratic inertia, and excessive red tape and corrupt officials.
In 1991, India-Pakistan trade was approximately 30 per cent of the total trade between SAARC partners. For Pakistan the biggest trading partners were Bangladesh and Sri Lanka which was similar to India’s trade relation in this region. However, two decades later though the total trade between SAARC countries had increased six times, the proportion of trade between India and Pakistan remained stagnant. It is important to emphasise the point, that we are only dealing with ‘official’ trade figures, especially in the context of India-Pakistan, where unofficial trade is many times that of the official trade.
India’s unofficial and smuggled exports to Pakistan are estimated at US$2 billion, while the official figures are a mere US$ 94 million. Though officially only around 700 items are under the list of imports to Pakistan, a much larger number find their way into Pakistan, from India to Bandar-e-Abbas in Iran, to Kabul and later to Peshawar. The selling price of these goods in Pakistan’s markets is substantially inflated due to this circuitous trading route. Pakistan imports iron ore at a higher cost from Brazil and Australia. Cars and scooters produced in Pakistan are priced 50 per cent higher than Indian vehicles. Pakistan is the second-largest consumer of tea in the world, a market that can be exploited by India. Indian drugs are 30 per cent cheaper. Pakistan has banned the import of textile machinery from India and manufacturers import the machinery mostly from Germany. Pakistan’s annual demand for tyres stands at 10, 00,000, whereas it produces only 200,000. Yet, it has imposed a 46.6 per cent duty on popular Indian truck tyres. Indian coffee is smuggled into Pakistan in a big way due to lack of official recognition. It is quite obvious that trade between India and Pakistan is fraught with possibilities and would clearly result in handsome rewards for both sides. Indian goods have ready-made markets in Pakistan and its neighbouring countries. Pakistan’s manufacturers could easily tap India’s large market size too.
Take the example of our trade with Sri Lanka. Here the important fact has been the rise of trade between India and Sri Lanka after the signing of FTA between the two countries nearly 15 years ago. In fact it is Sri Lankan exports to India which has have gone up from 20 per cent to 32 per cent of its exports to SAARC countries. In the same time India’s exports to Sri Lanka have remained at the level of 25 per cent of its exports to SAARC nations, thus ensuring that the major portion of the gain from FTA has accrued to Sri Lanka. At the same time the flow of trade between India and Bangladesh has also been reversed. In 1991 while Indian exports to Bangladesh constituted 58 per cent of its trade with SAARC nation, this figure has come down to 35 per cent in 2010. But the figure for Bangladesh has increased from 3.5 per cent of its trade with SAARC to 24 per cent. This evidence also shows empirically what is supported by theory that smaller economies benefit relatively far more from trade than larger ones.
The other aspect of trade that needs to be highlighted is a nation’s trade within the trade block as a proportion to its world trade. A large proportion of exports and imports that MERCOSUR members undertake are within the geographic boundaries of the trading block itself when compared with its neighbouring countries of the Latin America Integration Council (LAIA) and the rest of the world. It must be pointed out that import figures substantiate the fact that the gains from trade mostly accrues to the smaller economies. Both Argentina and Brazil have seen an increase in their imports from the other four countries of MERCOSUR after the trade pact was revived in 1993.
Similarly for ASEAN nations, their trade within the bloc forms a large chunk of their overall trade in Asia as well as their exports from and imports to the rest of the world. Imports from ASEAN countries as a percentage of imports from other parts of Asia have gone up for Indonesia, Singapore and Thailand pointing to the fact of increased intra-block trade wherein the larger economies absorb more of the imports. However, in the case of SAARC countries our trade within the bloc is miniscule as a percentage of trade that the individual countries undertake with Asia and other parts of the world. Compared to MERCOSUR and ASEAN, the major SAARC countries of India, Pakistan, Bangladesh and Sri Lanka trade little with each other when compared to their overall trade with Asia and the World.