Assignment IBT

of 11
International BusinessandTrade ….Maaz Rashid….[Prof.QadirBaloch]
Assignment
“Pakistan and India Trade Relation and Analyze should
Pakistan grant MFN status to India?”
1- Abstract-------------------------------------------------------------------------------------------2
2- Theoretical look at Pakistan-India trade Relations--------------------------------------3
 Regional cooperation will invariably lead to a larger market size for
products and services, as it will allow free movement and lower tariff rates.
3- India-Pakistan trade relations: Seizing golden opportunities-------------------------5
 Informal Trade----------------------------------------------------------------------------7
 Trade Composition-----------------------------------------------------------------------8
 Barriers to Trade--------------------------------------------------------------------------8
4- Resumed trade means hope for India-Pakistan relations------------------------------9
 Negative list and Positive list approach in trade
 Most Favoured Nation MFN Status
Assignment Prepared by: Maaz Rashid
Assignment Submitted to: Respectable Sir Qadir Baloch

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Abstract
Infelicitous sector development, policies aimed at harming a categorical country
within a trade cumulation, incompetent and ineffective joint ventures, the inability of
industriesto apportion cognizance, and engenderer groups gaining enough support in
a region to curb any regional trade are some examples. The terms ‘economic union’
and ‘economic cooperation’ have gained momentum. To understand regional
cooperation, it is paramount for a person to have cognizance about theories cognate to
international economicsand how they categorically apply to trade cognations between
Pakistan and India. The theory of comparative advantage expounds that two countries
can trade to their mutual benefit even when one is more efficient than the other in
engendering everything and the engenderers in the less efficient economy can compete
only by paying lower wages.
India-Pakistan cognationsare drawing considerable attention from the world at
immensely colossal, with the two countries now at a point where paramount economic
gains could accommodate as a strong betokens for conflict resolution. While theories
support open borders and free trade, our policymakers should not overlook and forget
the quandaries and hurdles associated with the policy and endeavor to address them
for the economic stability of the region holistically. Pakistan and India must
perpetuate and increment their economic activities irrespective of their border and
political disputes.
More than 80% of the goods traded in both directions are either raw materials
or intermediate goods. The value of informal trade between Pakistan and India via
third countries at $4.71 billion, which is twice the amount of formal trade between the
two countries. In 1995-1996, India gave MFN Status to Pakistan while Pakistan
perpetuated to sanction Indian imports predicated on its Order/ Import Policy/
Positive list. Reluctant to grant the MFN status to India, Pakistan alleged at the time
that India practiced a very rigorous bureaucratic import policy. These non-tariff
barriers are still believed to be the main reason Pakistan does not grant India the MFN
status.
The MFN status designates the recipient country must receive trade advantages
identically tantamount to the most favoured nation by the granting country. MFN
status simply betokens competitive opportunities for Pakistani and Indian
manufacturers in each other’s market.

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1- Theoretical look at Pak-India trade relations
Although all economic theoriesadvocate trade,many things have the potential
to go wrong in the practical world.
Inappropriate sector development,policiesaimed at harming a specific country
within a trade union, incompetent and ineffective joint ventures, the inability of
industries to share knowledge, and producer groups gaining enough support in a
region to curb any regional trade are some examples. The terms ‘economic union’ and
‘economic cooperation’ have gained momentum. To understand regional cooperation, it
is important for a person to have knowledge about theories related to international
economics and how they specifically apply to trade relations between Pakistan and
India.
The theory of comparative advantage explains that two countries can trade to
their mutual benefit even when one is more efficient than the other in producing
everything and the producers in the lessefficient economy can compete only by paying
lower wages. In this context, Pakistan is a medium-sized country (in terms of area,
resourcesand population) vis-à-vis its neighbors: India, China and Russia. While we
are proficient in producing cement, textiles and ceramics due to our labor expertise
and resource availability, it is hard for us to compete with India, for instance in the
software sector and with China in the electronics sector. Thus there is little room for
fears about Indian or Chinese hegemony destroying our markets.Trade and economic
cooperation with these countriesis going to be beneficial if Pakistan develops the right
sectors at the right time and then exports its surplus.
Regional cooperation will invariably lead to a largermarket size for products and services, as
it will allow free movement and lower tariff rates.
Through regional economic cooperation, if China is good in producing silk and
the Middle East is overflowing with petroleum products, then it would be bene ficial for
both India and Pakistan to supply food and cloth to these countries and import silk
and petroleum from them in return. According to the theory of economies of scale and
economic cooperation,the more firmsthere are in an industry, the higher the average
cost for each because the average labor input decreases as total output rises. This
advocates setting up joint venturesbetween firmsof a group of countries that produce
the same product, on a large scale,to ward-off high costs. Similarly, considering the
experience curve theory, a country that has extensive experience in an industry can
lower its unit cost more than another country with little experience can. Regional
alliances can also help the same industries learn from the experiences from an old
industrialized country.
Regional cooperation will invariably lead to a larger market size for products
and services,as it will allow free movement and lower tariff rates. An increase in the

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size of the market allows each firm (other thingsequal) to produce more and thus lower
its average cost. The firms and economies of the region can benefit a lot from such
alliances.
For example, the combined population of all countries in the South Asian
Association for Regional Cooperation (SAARC) region is more than 1.65tr, and the
demand for a product can rise by a factor of ‘n’. If economic integration occurs among
SAARC countries, the economies of scale will dictate that each country produce its
specialized range of products in a specific region, i.e. the fan industry in Gujrat
(Pakistan) and the automobile industry in Pune (India). The effectiveness of such
specialization could be observed in the future, with the end result of Pakistan
supplying India with better quality and lower cost fans and India exporting its locally
made cars. Similarly, Pakistan can produce seats or other automobile parts for the
Indian car industry at a lower cost, opening doors for intra-industry trade in
specialized goods. This is indeed the scenario of the future when more
industrialization occurs in the region. It will pave the way for external economies of
scale where we would be able to locate specialized suppliers in the same region; an IT
professional from Pakistan could travel to Bangalore and contribute their expertise to
this developed sector over there.The technical staff present in the area can also gain
from knowledge spill over, which will occur if many firms in the same industry can be
localized in a specific region.
Thus most of the trade policy measures are undertaken primarily to protect the
income of the producers. In such a case, it is the duty of the politicians to go for an
optimum tariff rate that should be lower than what the producers actually demand. All
regional organizations of which Pakistan is a part are trying to do the same.
Secondly, the domestic failure argument in favor of such measures is very
strong. At best, economists believe that internal market failures should be corrected
by domestic policies aimed at the problem sources. And the public in the trading
economies should be made aware about the true costs of the trade policy instruments.
Policy implementation is the most important and difficult part in how the government
acts for the betterment of its people. Economic theoriescan guide regional economies
towards having more free trade.
The policies emanating from these theories should be put into action keeping in
view the special case of India and Pakistan and the holistic view of the management
and development of economies within the local market.
The question remains whether the countries and their industrialists are jointly
ready for this change or not. Another question is about the willingness of firms in
these countries to form joint ventures. At the same time, while theories support open
borders and free trade,our policymakers should not overlook and forget the problems
and hurdles associated with the policy and try to address them for the economic

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stability of the region as a whole. Pakistan and India must continue and increase their
economic activities irrespective of their border and political disputes.
There were twofold increases in the exports from $ 63.67 million in the year
1994-95 to $ 157.22 million in the year 1996-97. The exports were $ 143.15 million in
1997-98 but decreased to $ 92.95 million in 1999-2000. Exports increased to $
186.83 million in 2000-01 to $ 206.16 million in 2003-04 and $ 286.94 million in
2003-04 which further increased to $ 521.05 million in the year 2004-05. The exports
to Pakistan were $ 1348.55 million in the year 2006-07. The highest exports from
1990-91 to 2008-09 were highest $ 1945.12 million in the year 2007-08 followed by
decrease to $ 1084.3 million in 2008-09.
2- India-Pakistan trade relations: Seizing golden opportunities
India-Pakistan relationsare drawing considerable attention from the world at
large, withthe two countries now at a point where significant economic gains could
serve as a powerful means for conflict resolution. After a hiatus of three years, the
bilateral relationship has received a boost, with a series of positive developments in
the last one month—the meetingbetween the two Prime Ministers on the sidelines of
the Paris climate summit; the meeting between the two National Security Advisors in
Bangkok; Sushma Swaraj’s visit to Islamabad for the Heart of Asia summit; and the
recent surprise visit of Narendra Modi to Lahore to greet and meet Nawaz Sharif on his
birthday have rekindled hope for the two countries.
The underlying message behind these meetings indicates the two governments’
commitment to take the bilateral dialogue process forward and mutually resolve all
outstanding issues for attaining long-term peace and economic integration in South
Asia.
With the foreign secretaries of the two countries slated to meet, all eyesare now
set on when an official meetingbetween Indian and Pakistani commerce secretaries
will be fixed, with a focus on fresh proposals to speed up the trade normalization
process.
At this stage, it is expected that Pakistan will grant India most-favored nation
(MFN) status. India should, in turn, announce deeper market access to Pakistan by
offering to reduce tariffdutiesto zero. India has already offered duty-free access to the
least developed countries of the SAARC—Afghanistan, Bangladesh, Bhutan, Maldives
and Nepal. It also offers duty-free access to Sri Lanka under the India-Sri Lanka
bilateral FTA. Offering similar treatment to Pakistan would not only foster trade
relations, but would also help in achieving the goals of the South Asian Free Trade
Area (SAFTA).
The most substantial impact of the trade normalization process would be on
informal trade flows, whichare oftenconsidered a defining characteristic of the India-

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Pakistan economicrelationship. According to a study done by ICRIER, informal trade
flows are estimated to be $4.71 billion in 2013-14. Of this, India’s exports to Pakistan
are estimated to be $3.99 billion and imports from Pakistan $0.72 billion. The main
export items from India, via informal channels, are jewellery, textiles, machinery and
machine parts, electronic appliances, scraps, paper, chemicals, tyres, and betel leaves.
India’s informal imports from Pakistan consist of textiles, dry fruits, spices, cement,
carpets, fruits and vegetables. The primary reason for informal trade is the high
transaction costs of trading, as a result of which traders often resort to trading
through third-country ports, mainly Dubai. Today, goods travel from Delhi to Lahore
through Mumbai, Dubai and Karachi, making the journey 11 times longer and four
times costlier. The move towards trade normalization would certainly lead to a
reduction in transaction costs and consequently shift informal trade flows to formal
channels.
However,for this potential to be realized, India and Pakistan need to prepare
themselves to facilitate the expansion of bilateral trade. The transport protocols
between the two countries also need to be amended to allow seamless transportation
of cargo in each other’sterritory. If the two countries agree to grant transit rights to
each other, India could be connected to Afghanistan and further to Central Asia
through its western neighbor. Pakistan, meanwhile, will be able to access India’s
eastern neighbors.
An increase in trade will be difficult without requisite financial mechanisms.
Even though the central banks of India and Pakistan signed an agreement that
allowed for the opening of branches by two Indian banks in Pakistan and two
Pakistani banks in India in 2005, this agreement has not still been implemented.
Without banking services, the provision of letters of credit and the facilitation of cross-
border transactions of funds, it will be hard for firms to trade across the India-
Pakistan border even when MFN is granted.
For several decades,limited people-to-people interactions because of barriers to
communication have inhibited information flows that could help expand trade.
Creating multilevel channels of communication is important for bringing businessmen
of both the countries together—which would help bridge information gaps, reduce
misconceptionsand generate a significant change in the business environment of the
two countries.
Finally,there is a need to engage with the media. In both India and Pakistan,
the media has a powerful influence on public sentiments.Negative reporting has so far
dominated India-Pakistan relationship. It would be much more helpful for reporters to
create a positive environment that is conducive to holding talks on trade normalization
between the two countries. The media should try to be optimistic about the benefits of
trade normalization and the possible impact this could have on strengthening bilateral
ties and regional integration.

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Golden moments in the history of India-Pakistan relationship are few and far
between. The two countries should capitalize on every opportunity that comes their
way. A successful meeting between the foreign secretaries could pave the way for a
new era in India-Pakistan relations.
The South Asian Association for Regional Cooperation (SAARC) consists of eight
South Asian nations, namely Afghanistan, Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan and Sri Lanka. Founded in 1985, the major goal of SAARC has been
to promote economic and regional integration of the member states.
However,political tensions between two of the largest members, Pakistan and
India, have plagued SAARC ever since its inception. Recent events on the Pakistan-
India border have forced the cancellationof the 19th SAARC Summit scheduled to be
held in Islamabad in November. With recently imposed restrictions on cross-border
exchange of artists, exhibition of movies and participation in cultural activities, other
economic activitiessuch as import and export of goods between the two countries risk
being curtailed as well. Political tensions and uncertainties have economic
consequences.
The article will investigate what trade relationsthe two countries have enjoyed
thus far to gain an insight into what possible effectsderailment of their relations will
have. Going back to 2004, when political tensions had receded, Pakistan and India
embarked upon initiatives to increase trade and consequently improve regional
integration.
Before 2004, there was minimal movement of goods between Pakistan and
India. Although, India had awarded Pakistanthe Most-Favoured Nation (MFN) status
in 1996, the exports from Pakistan to India remained almost negligible for a number of
years.
Pakistan’s exports to India were $84 million in 2003 and even at their peak in
2013, managed a modest $403 million, after which they receded to $312 million in
2015. On the other hand, the imports increased rapidly in absolute terms as trade
relations moved towards normalization. It increased from $184 million in 2003 to
$2.18 billion in 2013. It was at $1.96 billion in 2015.
The trade deficit for Pakistan – the difference between the imports from India
and exports to India – was more than five times the value of the exports from Pakistan
to India in 2015.
Informal trade
Furthermore, researchers at ICRIER (Indian Council for Research on
International Economic Relations) estimate the value of informal trade between
Pakistan and India via third countries at $4.71 billion, which is twice the amount of

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formal trade betweenthe two countries. The informal exports from Pakistan to India
are mainly in textiles and dry fruits, whereas informal exports comprise of jewellery,
textiles and machineryparts. Pakistan maintainsa negative list of 1,209 items, which
cannot be legally imported from India. Both countries maintain a sensitive list (as is
common with other SAARC member countries), which limits the provision of trade
concessions on the enlisted products. Informal trade circumventssuch restrictions on
trade.
Trade composition
India exported $263 million worth of vegetable products, $340 million worth of
chemical products, and $837 million worth of textile products to Pakistan in 2015
through formal channels. On the other hand, Pakistan exported $77 million worth of
vegetable products, $62 million worth of mineral products, $61 million worth of textile
products, $20 million of base metals and $14 million worth of medical instruments in
2015.In terms of total value of goods exported from India, Pakistan ranked in the top
five destinations for several products such as powdered milk, tomatoes, peas,
coconuts, polypropylene, raw cotton,polyester staple yarn, synthetic woven fabric and
imitation jewellery. Similarly,India is an important destination for Pakistani exports of
fresh and dried dates, gypsum, portland cement, tanned leather, raw cotton, woven
denim fabric, waste and scrap of different metals, and medical and surgical
instruments.More than 80% of the goods traded in both directions are either raw
materials or intermediate goods. The share of consumer goods is minimal. Therefore,
bulk of the goods traded between the two countriesare primary goods and unfinished
goods which require further conversioninto finished goods within the trading partner
before being sold as finished goods.
Barriers to trade
The analysis of tariff data from World Integrated Trade Solution (WITS) suggests that
Pakistan imposes lower import-weighted average tariff rates on the imports of Indian
products than the import-weighted average tariff rates imposed by India on the
imports of Pakistani products.
The analysis of data on non-tariff measures from UNCTAD and World Bank suggests
that India imposes higher technical barriers to trade on the imports of textiles and
agricultural goods amongst other goods. Additionally, India has multiple certifying
agencies involved in the process of implementing the non-tariff measures. It is likely
that procedural obstacles and administrative delays related to the implementation of
non-tariff measures result in impeding the imports into India from Pakistan.
Pakistan has an expanding consumer market and multiple free-trade agreements are
expected to be negotiated. According to the State Bank of Pakistan, the Consumer

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Confidence Index is at one of its highest levels. The private consumer spending is
expected to increase by 7% in FY16 compared to growth of 3.2% in FY15.
Planned infrastructure investments in Pakistan, too, are likely to promote industrial
growth and will consequently lead to greater demand for raw materials and
intermediate goods.
However,temporary restrictions on economic activities between Pakistan and India
can have a long-term impact on the trading pattern between Pakistan and India as
firms and businesses involved in trade between the two countries seek alternative
options due to the escalating hostilities.
3- Resumed trade means hope for India-Pakistan relations
Negative list and Positive list approach in trade
In negative list approach, trade in all commodities are permitted and
unregulated unless specificmeasuresare set out in the list of reservations. This is a
liberal form trade. In a positive list approach, only commodities evaluated and
approved would be permitted in trade. Pakistan has also announced its intention to
move over from the positive list to negative list on trade with India. Currently, Pakistan
has given access to 1,940 product lines on its positive list and has 12,000 on the
negative list.But half of the items on the positive list are not exported by India or it
imports these items.Pakistan is likely to take up the issue of end to non-tariff barriers
(NTBs) that prevent many of its goods from entering India. With Pakistan blocking
Indian imports by the positive list, India has so far maintained that the NTBs Pakistan
claims are not country-specific.
Most Favoured Nation (MFN) Status
This recent emerging rhetoric from Pakistan indicates a thaw between the two arch
rivals suggesting that Pakistanmight grant the much-awaited ‘Most Favoured Nation’
(MFN) status to India.
The MFN status means the recipient country must receive trade advantages equal
to the most favoured nation by the granting country. MFN status simply means
competitive opportunities for Pakistani and Indian manufacturers in each other’s
market.
In 1995-1996, India gave MFN Status to Pakistan while Pakistan continued to allow
Indian imports based on its Order/ Import Policy/ Positive list. Reluctant to grant the
MFN status to India, Pakistan alleged at the time that India practiced a very strict
bureaucratic import policy. These non-tariff barriers are still believed to be the main
reason Pakistan does not grant India the MFN status.
However,recent energy shortages, terrorism and international isolation has pushed
Pakistan to be more market flexible within the region, leading the previous Pakistan
People’s Party government to pursue trade normalization withIndia. Yet,despite many

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efforts, in December 2012, the grant of MFN decision was postponed until Pakistan’s
general election in May 2013, and the status remains unchanged.
This time Pakistan’s hesitation to accord the MFN status has been explained in the
context of a lack of framework available to encourage trade. Pakistan stresses that
relaxation on visa requirements, removal of trade grievances and customs cooperation
on the Indian side should be prioritized.
But that may not be the only reason: Some Pakistani business lobbies are to trying to
safeguard their interests,while competing with a more expanded, experienced and a
globalized Indian market. There have been clear pressures from the textiles, auto
parts, pharmaceuticals and agriculture industries, which have prevented the
government from allowing access to the Indian market.
At the same time, many in Pakistan believe that trade opening with India can result in
huge market gains. They argue that trade during unexpected food shortages in India
can provide instant economic boosts to the Pakistani economy. For example, during
an Indian onion shortage this summer, Pakistan was able to export onions to India.
The bilateral trade enthusiasts also advocate that trade normalization benefits both
countries by capturing revenue currently lost via smuggling and informal trade.
India, however,has always welcomed trade ties withits neighbors. Trade and industry
bodies in India are particularly interested in exploring the Pakistani market. These
bodies recently estimated bilateral trade was worth $2.34 billion and an Indian
investment up to over $50 billion in Pakistan.
The restrictive trade environment, has led to large informal trade flows between India
and Pakistan, estimated to range from US$ 250 million to US$ 3 billion. The most
detailed study on Indo-Pakistan informal trade estimated its value at around US$ 545
million in 2005. Of this, Pakistan’s imports from India are estimated to be around US$
535 million and exports to India US$ 10.4 million. The main import items from India,
via informal channels, are cloth, tires, pharmaceuticals, and textile machinery,
cosmetics, livestock and medicines; accounting for roughly 80 percent of total informal
import value. Pakistan’s informal exports mainly consist of textiles; accounting for
approximately 90 percent of the total informal trade. Trade via Mumbai-Dubai-Karachi
route to be around 88 percent of total informal trade, and the remaining as cross
border informal trade through the Amritsar-Lahore and Sind-Rajasthan border routes.
However,almost 51 percent of informal trade taking place via Dubai does not reach
Karachi directly as goods are transshipped from India to Dubai from where they are
shipped to Bandar Abbas in Iran and then moved further via land across Afghanistan,
to finally reach Pakistan. Only about 18 percent of informal trade takes place through
the sea route from India to Karachi via Dubai.

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Importance in one another’s trade (share in percentages)
Pakistan’s importance in India’s total
merchandise exports and imports
India’s importance in Pakistan’s total
merchandise exports and imports
year sharein
total
imports
share in total
exports
year share in total
imports
share in total
exports
1994 0.15 0.25 1994 0.71 0.56
1995 0.12 0.33 1995 0.89 0.54
1996 0.09 0.47 1996 0.29 0.39
1997 0.11 0.41 1997 1.23 0.51
1998 0.50 0.32 1998 1.37 2.52
1999 0.14 0.26 1999 0.91 0.81
2000 0.12 0.44 2000 1.72 0.71
2001 0.12 0.33 2001 1.41 0.7
2002 0.08 0.42 2002 1.83 0.45
2003 0.07 0.49 2003 2.2 0.48
2004 0.09 0.68 2004 2.9 0.71
2005 0.12 0.69 2005 2.71 1.12
2006 0.18 1.11 2006 4.52 1.91
2007 0.13 1.32 2007 5.97 1.61
2008 0.13 0.16 2008 2.56 1.82

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