The road to economic integration

Pakistan and India must begin with the low-hanging fruit of trade and commerce  

The road to economic integration
In less than two months, there have been four instances of Asian countries hitherto at odds agreeing to sit together, either for the first time or after a long gap.

The first in the series were the East Asian powers – China, Japan and South Korea – holding negotiations at the end of October to accelerate talks for a trilateral free trade agreement between them.

Exactly a week later, the leaders of the bone-deep political rivals China and Taiwan held talks first time since their split in 1949. These talks were only focused on bridging political differences between them, because their mutual trade is already thriving, with a current trade balance of a whopping $ 123 billion.

In the second week of December, South Korea and North Korea, carried out ice-breaker talks. The two countries are political and ideological rivals, do not have diplomatic relations, and their bilateral trade is negligible. The talks were inconclusive, but are good for future engagements.

Pakistan and India are the latest to join these countries. The talks between the so-called arch rivals had been in a stalemate since 2012. One of the items of the joint statement issued after talks between their foreign ministers in Islamabad on December 9 was that “both sides… agreed to a Comprehensive Bilateral Dialogue and directed the Foreign Secretaries to work out the modalities and schedule of the meetings”. According to the statement, the issues to be discussed in those meetings include economic and commercial cooperation. Commercial cooperation deals precisely with the trade of goods and services. Economic cooperation may involve broader issues on which agreement may not be easy. Although the end goal should be a holistic package involving all aspects of the economy, the two countries should begin with picking the low hanging fruit – cooperation in the field of trade and commerce. Commercial cooperation between India and Pakistan has been negligible so far. The total trade between them is just around $2.5 billion.

A Chinese resident in Japan waves the two countries' flags
A Chinese resident in Japan waves the two countries' flags

According to international trade theory, there are seven stages of economic integration. The first is a preferential trade area, which is a trading bloc of two or more countries that give preferential tariff access to certain products from the member countries. The second stage is a free-trade area, which is a trade bloc whose member countries tend to reduce or eliminate trade barriers like import quotas and tariffs within the bloc. The third stage is a customs union, which is a type of trade bloc composed of a free trade area with acommon external tariff. The fourth and fifth stages are common market and economic union. An economic union is a type of trade bloc in which members have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour), and a common external trade policy. The sixth and seventh stages are economic and monetary union, and complete economic integration.

Pakistan and India are more or less looking at the first stage of economic integration – a preferential trade area. They are both members of the South Asian Free Trade Agreement, but the pact has failed to deliver so far.

The abysmally low volume of trade between Pakistan and India and the overall poor progress in the commercial relations between the two countries reflect the challenges they face even within the first stage of integration, such as Pakistan granting the Most Favoured Nation status to India. New Delhi had granted that status to Islamabad in 1996. Trade talks between the two countries were suspended in 2012 when Pakistan withdrew from the decision of finally reciprocating the move.
Trade talks were suspended in 2012

When negotiations between the two countries start again, their trade talks may begin with more agreeable issues, such as bilateral cooperation for the implementation of the World Trade Organization’s new Trade Facilitation Agreement to reduce and eventually eliminate non-tariff barriers, harmonize standards and mutual recognition agreements, formalise the informal mutual trade worth around $500 billion, and better utilize the land routes available for trade. The measures may also include capacity building of officials under the Indian Technical and Economic Cooperation Program, and cooperation between the Foreign Trade Institutes of the two countries for program and curriculum development.

The writer is a civil servant. The views expressed in this article are his own, and not of the Government of Pakistan.