Since Pakistan and India account for more than 90 percent of South Asia's gross domestic product (GDP), low bilateral trade is an important constraint for the growth of South Asia's exports to the rest of the world as well as for the expansion of intra-regional trade. As a result of politics and suspicion overriding economics, South Asia remains the least integrated region in the world. South Asia's intra-regional trade amounts to just over one percent of the region's GDP as against 2.7 percent for the Middle East and Africa, and 7 percent for Latin America and East Asia. The rate for Europe and Central Asia is a staggering 16 percent.
In the 1980s, the South Asian countries took the bold step of establishing the South Asian Association for Regional Cooperation (SAARC), which was meant to promote trade and economic cooperation among member states, besides other goals. Over a period of more than two decades that SAARC has been in place, it unfortunately has not been able to break away the shackles of mistrust and misunderstanding between the two leading member states. Resultantly, the SAARC has been unable to promote intra-regional trade, which is an insignificant 5% as compared with 67% intra-regional trade in EU, 62% in NAFTA, 30% in ASEAN and 22% in COMESA.
It is an undisputed fact that the normalization of relations between the two countries holds the key to the Economic development of the entire South Asian Region and its peoples and hence; has been the topic of numerous debates, research papers and conferences.
The SAARC member countries including Pakistan and India concluded a landmark treaty SAFTA on January 6, 2004 with a pledge to allow free trade among member countries by eliminating trade barriers and scale down their tariffs in two phases to 0-5 percent from January 1, 2016. The treaty allows free cross-border movement of goods within the region, with the provision for a list of sensitive items for member countries to safeguard national interests.
SAFTA is likely to contribute significantly to intra-regional trade along with a scope for enhanced trade between India and Pakistan-particularly in transportation equipment and engineering goods, including IT products. Complete elimination of tariffs under SAFTA may increase the intra-regional trade by 1.6 times the existing level.
The liberalization of bilateral trade between the two countries would not only lend impetus to the integration of both the economies but would also be seen as a good omen by other nations. The potential advantages of trade liberalization for Pakistan appear to be large. Going well beyond the immediate creation of trade flows, the advantages of dismantling tariff and non-tariff barriers include the potential for boosting productivity and economic growth, and can also extend to promoting regional cooperation in all areas.
Trade liberalization will unambiguously benefit Pakistani consumers, since product prices fall and consumer choice increases with reduced trade barriers. Increased trade flow that stem from the lifting of import prohibitions from India would lead to additional customs revenue for Pakistan. Within the protective walls of regional economies, both countries can achieve specialization in various sub-sectors of the economy. Moreover, the strengthening of bilateral/regional trade would provide a cushion to the economies of both countries from the financial or stock markets' shocks.
According to research by Zareen Naqvi (2008) both India and Pakistan still use tariff and non tariff barriers to protect their domestic producers even after reforms have led to overall economic liberalization. India is ranked 102 out of 125 countries on the World Bank's Trade (MFN) Tariff Restrictiveness Index (TTRI) and Pakistan stands at 103rd place. India's trade regime is much more restrictive than other large emerging economies like Brazil, China, Mexico and Russia or compared to neighboring countries in South Asia. India's ranking on the Ease of Doing Business indicators are also quite low with the latest ranking at 133rd out of 183 countries compared to Pakistan's rank at 85th place for the year 2010.
In a number of sectors, specific tariffs and regulatory duties outside statutory MFN tariff rates are levied by India. Potential textile exports from Pakistan are subject to specific duties which can go as high as 50-100% in equivalent terms. The Pakistani exporters of textile and garments say that these are important barriers in their ability to access the vast Indian markets. According to Taneja's survey (2007) of Indian exporters doing business with Pakistan, very few NTBs in Pakistan restrict trade. India's, The World Bank's frequency coverage ratio of non tariff barriers of 51 percent was one of the highest in the world. In comparison, Pakistan's ratio was much lower at 29 percent. It also uses its stringent domestic standards whereas Pakistan applies normal international standards.
India - a much bigger economy accounting for more than 80 percent of Gross Regional Product, imbued with self-confidence and aspirations to become an economic power - should demonstrate a greater degree of generosity by removing these tariff and non tariff barriers unilaterally. A wider offer to its neighboring countries in terms of opening up the markets and trade and removing barriers to mobility would be of ultimate benefit to India. It is advisable for India to establish asymmetric relationships with its neighbors and provide more concessions to them and expect less from them in return.
Given the large and growing size of its effective market the economic losses to India would be miniscule while political good will and returns would be substantial over time. Pakistan, Bangladesh, Sri Lanka will be much better off economically if they are able to penetrate the buoyant Indian market. Friendly, peaceful and irritant-free neighbors would aid rather than hinder India in moving towards its long term goals. A region with the highest number of people living below the poverty line would surge ahead.