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Editorial Notes

[Editorial Notes] Border trade with Pakistan under stress

Amidst rising tensions between India and Pakistan since Pulwama attack, Pakistan has once again heightened the tensions by suspending bilateral trade.
By IASToppers
September 06, 2019

Contents

  • Introduction
  • Background
  • India-Pakistan Trade
  • Impact of rough trade ties with Pakistan on India
  • How Pakistan has been affected after economic suspension?
  • Way forward

Border trade with Pakistan under stress

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Introduction

  • Post the abrogation of Article 370 in Jammu and Kashmir, Pakistan cut off diplomatic and economic ties with India and it has expelled the Indian envoy, partially shut down the airspace and has suspended bilateral trade.

j&k--article-370-iastoppers

Background

  • In February 2019, in the wake of the Pulwama attack, India decided to withdraw Most Favoured Nation (MFN) status to Pakistan.
  • India also imposed 200% the customs duty on all Pakistani goods coming into India.
  • After the Balakot airstrikes, India and Pakistan closed their airspace with Pakistan keeping the ban in place for nearly five months.
  • India suspended trade, in April 2019, across the Line of Control in Jammu and Kashmir citing misuse of the trade route by Pakistan-based elements.

India-Pakistan Trade

india-pak-trade-iastoppers

  • In 2018-19, bilateral trade between India and Pakistan was valued at $2.5 billion.
  • The value of Indian export to Pakistan stood at $2.06 billion and India’s imports from Pakistan were worth $495 million.
  • After withdrawing MFN status and imposing 200% duty, Pakistan exports has decreased to $2.5 million per month from $45 million per month in 2018.
  • These retaliatory announcements have affected the trade relations between both countries.

Impact of rough trade ties with Pakistan on India

Adverse effects on border states

  • The trade through the Wagah-Attari land route was heavily in favor of Pakistan as India imported 82% of the total trade through the land route.
  • However, after Pulwama attack, only a few of the items like rock salt is being imported in India.
  • The border economies existence totally depends upon the cross-border economic opportunities.
  • These border economies experience trade fluctuations on account of political changes, trade bans, price and exchange rate and tax fluctuations.

Example of Amritsar

  • Amritsar’s major economic activity is largely dependent on border trade with Pakistan.
  • Amritsar is land-locked, is not a metropolis and traditionally has no significant industry. Hence, any decision on India-Pakistan trade has a direct impact on the local economy and the people of Amritsar.
  • Out of total ₹25-30 crore that was being added to the local economy of Amritsar every month, now the three-quarters have been lost in the last six months.

Increased freight rate of trucks

  • Gypsum is imported from Pakistan which is used in India as well as in Nepal for the cement
  • To avoid empty truck on the return journey, trucks carrying gypsum brought back specific products such as yarn from mills in Uttar Pradesh to Punjab.
  • In the absence of gypsum trade, the freight rate of trucks from Uttar Pradesh to Punjab has increased from ₹3 to ₹7 per kg.
  • The prices of goods, checked by such kind of balancing mechanism of international trade, are experiencing fluctuations because of high trade disruptions.

How Pakistan has been affected after economic suspension?

  • The exports of cotton from India to Pakistan are expected to be affected the most on the complete suspension of bilateral trade which will ultimately hurt Pakistan’s textile industries.
  • The lawn industry will be affected as well which will now have to source pricier cotton from alternative markets in the United States, Australia, Egypt or Central Asia.
  • There is a high possibility that Indian cotton, along with other products, will be routed through third countries such as the United Arab Emirates and Singapore which is estimated to be more than double the direct trade between India and Pakistan.

Way forward

  • While the overall economies of the two countries may very well manage to stay afloat despite the suspension of economic ties, it is the local economies that will suffer the most.
  • The trade disruptions generate few questions like what are the alternatives for border states for livelihood and will such economic suspension affect bilateral trade ties with Afghanistan where the transit of goods takes place through Pakistan.
  • The only solution to the ongoing problem is to manage the damage, reduce it and try to contain it.

IT’s Input

Most Favoured Nation (MFN)

India-Pak--iastoppers

  • MFN requires that a country act fairly with all WTO member countries, extending the same privileges and immunities granted to one country to all members.
  • A country which provides MFN status to another country has to provide concessions, privileges, and immunity in trade agreements.
  • It is the first clause in the General Agreement on Tariffs and Trade (GATT).
  • It denotes the equal treatment of all countries.
  • In international trade, MFN treatment is synonymous with non-discriminatory trade policy because it ensures equal trading among all WTO member nations rather than exclusive trading privileges.
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