Before undertaking more long-term fundamental reforms, both countries need to build public support for trade liberalization. Initial steps should focus on bilateral measures that can be accomplished relatively easily-by executive order rather than via legislation and with minimal resource implications-and that would meaningfully increase trade while gaining support for bigger and bolder steps down the line.
While a few of the measures proposed here fall under the ambit of the World Trade Organization (WTO) and have to be handled in a multilateral setting, most would involve only bilateral agreements between the two countries.
Short-term Measures
Many of the short-term measures proposed here were agreed in principle at the Musharraf-Singh meeting. However, the agreements were limited in scope and, even so, were not implemented. Since the issues are well known and have also been highlighted in the Report on NTBs by the Trade Development Authority of Pakistan, and will also be discussed in the forthcoming meeting of the Secretaries of Commerce of both the countries in September 2011; it should be possible to move ahead rapidly on expanding and implementing the measures if the political will is there.
The specific short-term measures, mainly relating to trade facilitation, could include:
-- Easing restrictions on visas, specifically, allowing multiple-entry visas for at least 500 businessmen, eliminating requirements to report arrival to the police at each place of stay, eliminating city-specific visas, and speeding up the approval processes;
-- Signing a protocol to permit Indian/Pakistani ships to lift cargo for third countries and eliminating the reciprocal requirement that ships touch a third-country port before bringing in imports. The third-country port restriction particularly affects trade of high-hulk, low-value goods, such as coal, tar, and cement, making their transportation via sea commercially unviable. Also allowing sea shipments in addition to the current Mumbai-Karachi route;
-- Eliminating the reciprocal requirement that rail wagons carrying goods across the border return empty, increasing the frequency of rail traffic, and improving the coordination between the railway authorities. We suggest restarting the old Sindh-Rajasthan rail link;
-- Based on 2006 composite dialogues, both countries need for resumption of Rail Service between Khokhrapar and Monabao, bus service between Srinagar and Muzaffarabad, religious visits to Lahore and Nankana Sahib, new shipping protocol, deregulation of air services and joint registration of Basmati rice.
-- Opening additional bus routes. The Musharraf-Singh meeting in April 2005 yielded a commitment to increase the frequency of the cross-Kashmir bus service via the Srinagar-Muzzafarabad route. However, the bus service is only weekly and restricted to passengers who have relatives on the other side of the border;
-- Increasing air links between the two countries. Currently, the only air links agreed are Lahore-New Delhi, Karachi-New Delhi, and Karachi-Mumbai. There is no direct air link between the two capitals (Islamabad-New Delhi) and other important commercial cities
-- Increasing the number of customs posts where "sensitive" items can be cleared and eliminating requirement for 100 percent verification; and are cleared smoothly
-- Governor Reddy (Reserves Bank of India) and Governor Dr Ishrat Hussain (State Bank of Pakistan) signed an agreement for opening of branches by two Indian banks in Pakistan and two Pakistani banks in India in 2005. This agreement has not yet been implemented. Without banking services, opening of letters of credit, cross border transactions of funds, trade cannot take place.
-- Technical barriers to Trade (TBTs), Sanitary and Phyto Sanitary Measures (SPS) that are in fact, acting as powerful deterrents to exchange of goods should be rationalized and simplified. These are, in fact, non-tariff barriers that hinder the flow of goods.
Medium-term Measures
The short-term measures outlined above should provide the stepping stones to move to more fundamental reforms in trade relations between the two countries. Over the medium term, the key measures would be for Pakistan to grant MFN status to India, which India has already provided to Pakistan, and allow transit trade from India. These measures could be complemented by India by reducing tariff rates on goods of particular interest to Pakistan and removing non-tariff barriers, including in agriculture. The authorities should also seek to agree on steps to harmonize-or at least make more transparent-customs procedures and product standards. To the extent that regulations or government practices constrain FDI and services trade, an end to these constraints should be negotiated. Eliminating double taxation would also boost the attractiveness of cross-border investments. These steps would greatly expand the scope of integration, with potentially large efficiency gains on both sides.
The South Asian Free Trade Agreement (SAFTA), which came into effect in January 2006, provides a framework for removing some obstacles to trade, but its implementation alone is not likely to dramatically improve economic integration. SAFTA calls for tariff rates within the region to decline to zero by 2012, but it is highly unlikely that this target will be met. Currently, tariff rates in India are significantly higher than those in Pakistan. In particular, India's high tariffs on agricultural products and textiles severely discourage Pakistan's exports to India. The Pakistanis believe that these tariffs are implicitly targeted at their country, whose potential exports would mainly include these two items (e.g., cotton yarn and fruits and vegetables).
Finally, infrastructure in both countries needs to be significantly improved and harmonized: Roads need to be expanded and upgraded, and ports need to be modernized. Both countries are seeking ways within their overall fiscal constraints to move rapidly on these fronts. Improving regulatory frameworks for key infrastructure sectors would help attract the private sector to participate in improving infra-structure in both countries. In addition, the scope for trade in energy appears to be sizeable, and eventually both countries could work on developing a joint energy grid.
The specific medium-term measures toward greater economic integration between India and Pakistan could include:
-- Pakistan should follow WTO rules and reciprocate by providing MFN status to India and abolishing the positive list approach while India should reduce its tariffs on agriculture commodities, textiles and other goods that are of potential value to Pakistan. Both countries should apply MFN duty rates to items on the sensitive lists.
-- Both countries should reactivate SAFTA and agree on a phasing out of the sensitive list over next few years. A restrictive list would nullify all the potential gains of preferential trade access.
-- Trade facilitation through expeditious border crossings, streamlining documentation requirements, border agency coordination, opening of new border crossings, quick custom clearance, Electronic Data interchange, telecommunication, improved transport links, shipping protocols, easing visa restrictions for businessmen should be carried out immediately. Railway, air and road connections between the two countries should be increased.
-- Domestic tax, tariff and subsidy policies that distort incentives for production and trade should he substituted in both the countries by more neutral policies.
-- Institutions to manage and facilitate trade integration such as setting standards, quality control, technical regulations, material testing should be strengthened and made user friendly. India should significantly lower tariff rates for goods of particular interest to Pakistan (e.g., textiles, leather, and onyx) and remove non-tariff barriers.
-- Pakistan should allow transit trade from India. WTO rules require Pakistan to allow transit trade for all goods to and from third countries (including Afghanistan and the countries in Central Asia).
-- Both countries should also allow trade in information technology (IT). Despite India being well ahead of Pakistan in this field, both countries could engage in mutually beneficial business-to-business links. Since IT trade does not involve movement of goods, it would be easier to move ahead quickly in this area. For example, Pakistan could allow large Indian IT companies to set up call centers and other IT-related firms, taking advantage of the existing (and growing) English-speaking workforce in Pakistan.
-- Both countries should harmonize their customs procedures, including more standardized and transparent documents and inspection procedures and product standards. Also, sanitary and safety laboratory inspections in one country should be accepted in the other.
-- Obstacles to FDI flows, other than restrictions based on national security grounds, in both directions should be eased and obtaining government approval streamlined. Each country's companies should be allowed to float shares in the securities markets of the other, and double taxation on corporate and individual incomes should be removed.
-- Harmonization in legal regulations for investor protection, contract and IP Rights enforcement, labour relations, would promote relocation of industries within the region as the expanded market size and mobility of goods and services would result in economies of scale. Locations for inputs, components, raw materials with low transaction costs would confer comparative advantage to final finished goods.
The above outlined measures, if implemented sincerely, can open a new vista for the two countries in the 21st Century, It is high time political leaderships of India and Pakistan demonstrate courage and conviction.
Source: Muhammad Iqbal Tabish Secretary General, SAARC CCI
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