New Pak-Afghan Trade Agreement and India

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Context

Afghanistan has lately been demanding of Pakistan to re-evaluate the 46-year-old Afghan Transit Trade Agreement (ATT) due mainly to the changing regional dynamics. Both countries now appear to have finalized talks for the renewal of the Afghan Transit Trade Agreement (ATT). However, Pakistan has refused to accede to one of the key Afghan and American demand i.e., allowing Indian exports to Afghanistan via Pakistani territory. Without successful resolution of political challenges, it is hard to realize the economic potential of the region. Nonetheless, the promise of economic benefits can go a long way towards diluting the political hurdles.

Analysis

On one hand Pakistan desires increase in regional trade and market access but on the other hand doing so could provide its archrival India an economic advantage, by allowing it to reach the markets of Afghan and Central Asian through its territory.

At present Afghan imports are dominated by Pakistan and the balance of trade between the two countries is by far in favor of Pakistan. The official trade between the two countries is more than one billion dollars. However, according to the Area Study Centre for Afghanistan at the University of Peshawar, the total volume of trade (official and unofficial) between the two countries is close to $12 billion.

On January 26, 2010, the Punjab Assembly of Pakistan had passed a unanimous resolution asking the federal government not to give India access through Pakistan, to reach Afghan and Central Asian markets. The reason given by the Punjab legislators for denying India trade route is the Kashmir and water disputes between Pakistan and India. The members contended that India could only be given a trade corridor through Pakistan once India solves Kashmir issue and restores the agreed upon quantity of water to Pakistan rivers. Pakistan government has also made its view known on this matter; India has not allowed it trade access to countries like Nepal and Myanmar. It is clear that the economic decisions in the region have been made subservient to the political challenges.

Smuggling and its Impact on Pakistan’s Economy

Since 2001 a multi-billion dollar foreign funded reconstruction efforts have continued in Afghanistan. A large part of the demand for construction items, ranging from cement and electrical products, has been met by Pakistan. Pakistani industries and companies have also been fulfilling the demands of Afghanistan for its medical and food needs, such as pharmaceuticals, packed milk, drinking water, livestock, wheat, rice and other agriculture produce. Up to 80 percent of the supplies for NATO forces, also make their way through the seaport of Karachi to Afghanistan. Landlocked Afghanistan and Coalition Forces there are heavily dependent on Pakistan, as the country provides not only the shortest but also the most economical and politically viable access point.

According to Federal Board of Revenue figures, the value of total smuggled goods into Pakistan stands between $4 to $5 billion. Additionally, 70 to 75 percent of the revenue losses to the country have been due to those items that were exported to Afghanistan under ATT, but find their way back into Pakistan.

One of the key obstacles in the way of ATT is the substantial smuggling of goods. These goods are imported originally by Afghanistan from Pakistan, but make there way back in to Pakistan. In the absence of uniform tariffs on both sides, allowing India to export products to Afghanistan can become troublesome for Pakistan. Pakistan believes allowing India to supply goods under the new ATT mechanism would be detrimental for Pakistan in a number of ways. Permitting India to export the above mentioned products and goods to Afghanistan would directly conflict with the interests of Pakistani businessmen. For the most part, the Indian goods are substantially cheaper than Pakistan’s. Even with the added transportation cost and tariff, India will maintain a competitive advantage over similar Pakistani products. This dynamics already results in smuggling of goods from India to Pakistan and has created an acute shortage of certain commodities in Pakistan. In addition to inflation, this scarcity has resulted in dramatically increasing the prices of essential items.

Due to the above calculus, some shady Pakistani commercial enterprises often resort to exporting the comparatively expensive domestically produced products and goods to Afghanistan, while acquiring and smuggling similar cheaper products and goods from India, China and other places, for local consumption. If India is allowed to export to Afghanistan, these inexpensive products and goods will eventually be smuggled in mass in to Pakistani markets from across the border.

So if Indian goods are allowed entry into Afghanistan through a fresh ATT agreement, there are ample chances the Pakistani markets would flood with cheap Indian goods. This would increase the revenue losses for Pakistan, which is already facing declining economic activity due to terrorism, and will result in further shrinking of the country’s revenue base. The industrial infrastructure of Khyber-Pukhtunkhwa and Balochistan provinces of Pakistan, that border Afghanistan, is already collapsing from the pressure of Afghan smuggling and extremism. With the possibility of Indian products being smuggled to Pakistan from Afghanistan as well, the local industries in these provinces will not survive.

Pakistan-India Trade Ties and ATT

India has already granted Pakistan the Most Favored Nation status for trade. According to which, Pakistan is allowed to export a list of 1934 items to India. Pakistan has been considering to reciprocate India. However, economic and political worries, as explained above, have continued to hamper the trade ties between India and Pakistan. The SAARC countries have also pressured India and Pakistan to resolve their political disputes. According to one estimate, India and Pakistan together account for 90% of the South Asia’s GDP.
The bilateral trade between India and Pakistan was at $2.3 billion in 2007-08. The Indian Planning Commission estimates the potential for bilateral trade between India and Pakistan is at $10 billion. On a promising note, India and Pakistan recently agreed to develop a list of negative items, while allowing trade for the positive items to proceed.

Conclusion

No doubt, without positive development on political side between India and Pakistan, the region cannot be expected to achieve its full potential. From the deadlock that exists, Afghanistan and Pakistan stand to loose more as compared to India, which is already reaping the benefits of its larger size and from its Look East Policy. Pakistan’s economy and industries appear ill prepared for the arriving forces of globalization and will have to become more competitive. Future would have to be envisioned not only from the prospect of conflict but also opportunities. Sooner rather than later Pakistani businessmen will have to confront the forces of open markets, whether they are at home, Afghanistan or Central Asia.