Four Reasons Why India and Pakistan Should Expand Trade

Recent studies estimate that trade between India and Pakistan could swell at least 10 times larger if the countries adopted a bilateral free-trade agreement. Pakistan moved in this direction in November 2011 with a significant policy shift giving India Most Favored Nation status. Thunderbird School of Global Management Professor Kishore Dash, Ph.D., offers four reasons why India and Pakistan should use the momentum to move toward even greater trade relations. He says benefits would include expanded market access, economic growth, energy benefits, and regional stability.

Expanded market access

India has launched several initiatives in recent years to form trade agreements around the world, resulting in significant economic growth and export opportunities. However, Dash says India no longer can ignore its own base in South Asia, where it enjoys a comparative advantage in almost every economic sector. It makes sense for India to include Pakistan, South Asia’s second-largest country, in its search for new markets. Greater trade with Pakistan also would open possibilities of transit trade and market access beyond Pakistan into Central Asia.

Similarly, Pakistan’s need for market access has led it to sign bilateral free-trade agreements with several countries, but those markets pale in comparison to India’s huge market potential for Pakistani goods. In addition, India shares the largest common border with Pakistan, offering immediate access for Pakistani goods if border negotiations were to prove successful.

Economic growth

Given its relatively larger economy, India would likely reap greater benefits than Pakistan with a free-trade agreement. However, several studies show that any increase in Pakistani trade with India would produce a positive impact on Pakistan’s economy. Several recent studies show that removal of tariffs would lead to a spike in the volume of bilateral trade with a profound impact on each country’s GDP growth.

Under the Trade Liberalization Plan of the South Asian Free Trade Area (SAFTA), India and Pakistan have agreed to reduce tariffs to below 5 percent. If implemented, it would mean that Pakistan’s general exports of small manufactured goods would find ready markets in India. In addition, some illegal transactions would become legal, resulting in the substantial reduction of transportation costs and transit time. Free trade also would foster more cross-border investments in several areas, including information technology. This ultimately would boost Pakistan’s emerging IT and knowledge infrastructure and enhance its ability to attract foreign investment.

Trade liberalization could promote not only increased trade between India and Pakistan, but also serve as an engine of growth for SAFTA and support the least-developed member countries.

Energy benefits

Energy deficits are worsening in Pakistan, and India’s energy needs have grown exponentially over past decades. Some believe that Pakistan can play an important role in fulfilling energy needs by providing a transit route for energy from Central Asia and Iran. A proposed Turkmenistan-Afghanistan-Pakistan-India gas pipeline project would allow Turkmenistan to supply 33 billion cubic meters of gas to India and Pakistan for a 30-year period. Pakistan also will most likely benefit because of transit fees and foreign exchange earnings.

Regional stability

Despite political tensions, trade expansion between China-Taiwan, India-China, U.S.-China, and U.S.-Russia illustrate that trade cooperation is an effective instrument in improving interstate relations. From the Indian perspective, expanded trade with Pakistan would likely provide an opportunity for India to counter China’s growing influence over Pakistan and the South Asian region.

Dash’s full article, titled India-Pakistan Trade: Opportunities and Constraints can be found in the Winter/Spring 2013 issue of Georgetown Journal of International Affairs.

Media can contact Virginia Mungovan at virginia.mungovan@thunderbird.edu or (602) 978-7081 for more information.

About Kishore Dash, Ph.D.

Dr. Dash is an associate professor of global studies at Thunderbird School of Global Management in Glendale, Arizona. He specializes in international political economy, particularly as it relates to China, India, Pakistan, Singapore, Malaysia and Thailand. Other areas of expertise are business in India, international and regional organizations in Asia/Pacific, and international and regional trade cooperation. He has lived and worked in India, Singapore, the United Kingdom, Czech Republic, China and the United States.

About Thunderbird School of Global Management

Thunderbird is the world’s No. 1-ranked school of international business, with nearly 70 years of experience in equipping global leaders with the business skills and global mindset necessary to create sustainable prosperity worldwide. For more about Thunderbird, visit http://www.thunderbird.edu.

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