Trading with the Neighbours.
From time to time, Pakistan is given the shaft for 'short-shrifting' regional trade. In particular, the finger is pointed at the security related policies of Pakistan for having 'hobbled' the growth of trade with neighbouring countries. Admittedly, Pakistan's regional trade is below the desired level. However, any analysis which sets down the regional trade situation to a set of government policies is only skin-deep. Instead, it's imperative to take into account the whole gamut of regional political-economy dynamics to understand the obstacles to expansion of Pakistan's trade with its neighbouring nations.
Trade, including regional trade, presents a trade-off among competing interests. This statement may be a tautology but it brings to light arguably the most crucial aspect of trade-whether it's in a regional or multilateral context. Trade has winners as well as losers. While it may make one group better off, it will leave another worse off. For instance, when Pakistan exports large consignments of rice, it's the rice millers who gain at the expense of consumers, who have to pay a higher price for the commodity.
The effects of trade cut across social spheres. It's not only the economic but political and cultural interests as well on which trade expansion, or for that matter contraction, casts its impact favourably or adversely. When, take another example, the European Union (EU) grants GSP-plus trade concessions to countries like Pakistan subject to compliance with some international conventions relating to human rights and governance, the effects are both economic-increase in exports-and political-intrusion into the country's politico-legal system.
More than a decade ago when the government in Sri Lanka was in the final phase of putting down Tamil insurgency, the EU had suspended the country's GSP-plus status for alleged human right abuses. But a defiant Sri Lankan government went ahead with the military operation brushing aside the loss of a few hundred million Euros, thus demonstrating that national security outweighs trade. Recently, the United Kingdom left the EU when it found that regional integration was undermining its national interest. In the end, every nation has to decide which interests to enthrone above others.
The relationship between economic and political relations of sovereign states goes either way. Regional economic integration, as in case of EU countries, may serve as an instrument of averting inter-state political hostilities and strengthening political relations. Conversely, political tensions, as in South Asia, may thwart regional trade. It's by no means necessary that what's true of, or good for one region is also applicable to another. This is for the reason that every region has its own dynamics. By the same token, trade, while it may bring two countries together, may pull them apart or escalate tensions between them. At present, the United States' growing trade deficit with China is probably the thorniest issue between them. The search for markets or raw materials, let's not forget, has been a powerful casus belli for wars in history.
Moving back to Pakistan's regional trade, we will first present the facts and then analyze the factors that bear upon Pakistan's trade performance in the regional context. The facts and the analysis will be confined to Pakistan's trade with the countries of South Asia or South Asian Association for Regional Cooperation (SAARC), the members of Economic Cooperation Organization (ECO), and China. SAARC comprises eight countries, namely Pakistan, Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, and Sri Lanka. ECO has ten members including Pakistan, Afghanistan, Azerbaijan, Iran, Kyrgyzstan, Kazakhstan, Tajikistan, Turkey, Turkmenistan, and Uzbekistan. Thus in addition to Pakistan, Afghanistan is the only country that is a member of both ECO and SAARC. Both these blocs have economic integration as one of their core objectives.
Although Pakistan does not share the membership of a regional trade agreement with China, our north-eastern neighbour, both countries have a free trade agreement (FTA), which is operational since 2007. Pakistan's regional trade is summarized in Table 1.
Table 1: pakistan's Regional Trade in 2016
Value in Billion USD
Partner###Pakistan's###Pakistan's###Total Trade###Share in
Calculations based on United Nations Comtrade Data
Pakistan's regional trade in 2016, the last calendar year for which full year is available, was USD 22.76 billion ($5.94 billion exports and $16.82 billion imports). This included $15.27 billion trade with China ($1.59 billion exports and $13.68 billion imports), $4.75 billion trade with South Asian countries ($2.61 billion exports and $2.14 billion imports), and $2.74 billion trade with ECO countries ($1.74 billion exports and $1.0 billion imports). Pakistan's regional trade accounts for 34.22 percent of its global trade, 28.93 percent of its global exports and 35.79 percent of its global imports. Trade with China makes up 22.96 percent of Pakistan's global trade (exports: 7.74 percent, imports: 29.11 percent). The South Asian and ECO regions account for 7.14 percent (exports: 12.71 percent, imports: 4.55 percent) and 4.12 percent (exports: 8.48 percent, imports: 2.13 percent) of Pakistan's world trade respectively.
Country wise, Pakistan's major trading partners in the region in addition to China are Afghanistan, India, Bangladesh, and Turkey. India is Pakistan's largest trading partner in South Asia. Pakistan's total trade with India is $1.99 billion including $341 million exports to India and $1.64 billion imports from India. This gives India 3.3 percent share in Pakistan's global trade, 1.69 percent share in Pakistan's global exports, and 4.23 percent share in Pakistan's global imports. At the same time, Pakistan accounts for less than one percent of India's world trade. The low level of Pak-India trade is one of the principal reasons for ineffectiveness of SAARC in the economic sphere (albeit political reasons for which India shares main responsibility).
Table 2: Pakisatn's Trade with Some Regional Countries in 2016
Value in Million USD
Calculations based on United Nations Comtrade Data
Pakistan has a very healthy trade turnover with Afghanistan-$1.73 billion including $1.36 billion exports to Afghanistan and $369 million imports from that country. Afghanistan is Pakistan's third-largest export market accounting for nearly 7 percent of Pakistan's world exports.
Since Afghanistan is a member of both SAARC and ECO, Pakistan's major trading partner in ECO region after Afghanistan is Turkey. The total bilateral trade is $496 million including $236 million exports from Pakistan and $260 million imports from Turkey. Pakistan's trade with the five Central Asian Republics (CARs) is $87 million including $37 million exports and $50 million imports. With Azerbaijan, the bilateral trade is $61 million.
Thus among the regional countries, China is Pakistan's largest trading partner. It's also Pakistan's largest trading partner globally. Pakistan is running $12 billion trade deficit with China, which although a cause for concern, is understandable. Because of the enormous size of the domestic market, China enjoys cost advantages that few other countries match. Over the past more than two decades, China has maintained a very healthy growth rate, the economy has diversified substantially, and the country has moved up the value chain in manufacturing. The growth in China has been export driven. Although in 2016, the export-GDP ratio came down to 19.6 percent from 37 percent in 2006 (World Bank data), as the country is focusing more on domestic demand, the ratio on the whole has remained very high considering that bigger countries tend to have lower export-GDP ratios. By contrast, Pakistan's export-GDP ratio is only 9 percent.
Pakistan's FTA with China has also been instrumental in driving up the bilateral trade imbalance. The China-Pakistan Economic Corridor (CPEC) can be another instrument of significantly enhancing bilateral trade. However, at least in the short run, trade balance would further tilt in favour of China.
The SAARC region accounts for only 7.1 percent of Pakistan's global trade. Despite the presence of the South Asian Free Trade Agreement (SAFTA), which is in force since 2006, the intra-region trade is less than 7 percent of the world trade of the eight member countries. The major reason is said to be lack of normal trading relations between Pakistan and India. Pakistan has not granted the Most Favoured Nation (MFN) status to India. The MFN principle essentially stipulates that a country should accord the same level of market access to all its trading partners. One major exception to the MFN treatment is that a country may grant preferential treatment to imports from other countries with which it has an FTA. The market access is broadly categorized into import tariffs and non-tariff measures (NTMs). Pakistan applies the MFN or normal tariffs to all imports from India. However, Pakistan maintains a negative list, comprising some 1200 products, for imports from India.
These products cannot be imported. It is this import restriction that withholding India's MFN status entails, which Pakistan sees as an NTM.
On the other hand, our exporters maintain that Pakistan-specific NTMs-such as cumbersome product certification and customs clearance procedures, restrictive trade routes, and visa issues-in India-restrict their access to the enormous Indian market. These NTMs vitiate the MFN market access for Pakistan's exports in India and are one of the reasons for Pakistan's $1.3 billion trade deficit with India.
The hostile political relations between Pakistan and India have also cast a pall over the bilateral trade. Pakistan has historically linked normalization of commercial relations with India to that of political ties, in particular the resolution of the long-standing Kashmir dispute. The Pak-India composite dialogue, which kicked off in 2004, was an attempt to sort out the outstanding, including commercial issues between the two countries. The process, however, come to a standstill in the wake of the 2008 Mumbai attacks, which India set down to "the non-state actors from Pakistan." Be that as it may, in a departure from its historic stance, in 2011 in a unilateral move, Pakistan replaced the positive list for imports from India with a negative list. The positive list meant that only the products contained on the list could be imported from India. The move was aimed at normalizing the bilateral trade relations.
However, it did not prompt a similar overture from New Delhi in the form of easing of the restrictive NTM regime.
In recent years, the Pak-Afghan bilateral trade has come down. For instance, in 2013 Pakistan's exports to Afghanistan were $2 billion; thereafter the exports started declining. Iran has replaced Pakistan as the largest source of Afghan imports. Being a land-locked country, Afghanistan is dependent on Pakistan, as well as Iran, for its overseas trade. The causes of the downward movement of Pak-Afghan trade are both political and economic.
The tense security situation in the region occasionally causes the closure of the Pak-Afghan borders at Torkham and Chaman. Even when the borders are open, beefed-up security measures slow the movement of the traffic. Another reason is tariff differential. The import tariffs in Afghanistan, which has no domestic industry worth mentioning to protect, are much lower than in Pakistan. Therefore, the Afghan transit trade through Pakistan has become a conduit for smuggling, forcing the Pakistan Customs to take to more stringent countermeasures than the Afghans would like.
Besides, New Delhi has tricked Kabul into believing that Afghanistan's economic, not to speak of political, problems are largely due to Islamabad. One answer, as suggested by New Delhi, is to give the Indian exports overland access to Afghanistan through Pakistan. Such a move would only result in India replacing Pakistan as a principal supplier to Afghanistan; it would neither drive up Afghan exports nor drive down Afghanistan's immense trade deficit. Nevertheless, essentially for political reasons, the overland access of Indian exports to Afghanistan remains the foremost item on the Afghans' wish list for enhanced economic ties with Pakistan. At any rate, the countries of South Asia should first learn to live in concord, which is contingent upon resolution of the key issues; regional integration will come through subsequently.
Afghanistan aside, Pakistan's low trade volume with other ECO countries has multiple causes. One, the ECO is arguably the only region in the world, which does not have a functional preferential trading arrangement. The ECO Trade Agreement (ECOTA), which was signed in 2003, has not yet come into effect despite commitments made by the top political leadership from time to time. Besides, the ECOTA has been signed only by five, out of ten ECO members, namely Pakistan, Afghanistan, Iran, Turkey, and Tajikistan. This shows the actual level of commitment to regional economic integration among ECO countries.
Two, the commitments of the members to trading blocs outside the ECO have also hampered bilateral trade. For instance, Kazakhstan and Kyrgyzstan are members of the Eurasian Customs Union, a Russia-led trading bloc, which dampens their interest in shoring up trade relations with other ECO members. Among the CARs, only Tajikistan is a signatory to ECOTA. On the whole, the trade policies of CARs are Russia-centric. Turkey has a customs union with the EU and prizes its trade relations with the mega bloc more than those with ECO countries, with the exception of Iran from which it purchases oil and gas.
Three, international sanctions on Iran struck a heavy blow to its world trade. The sanctions also left Iran a highly regulated, protected, and non-transparent economy, with exceedingly high tariffs and other stringent barriers to trade. They also rendered Pak-Iran PTA, in force since 2006, virtually ineffective. Not surprisingly, the bilateral trade nosedived from $1.06 billion in 2010 to $358 million in 2016. The lifting of most of the sanctions offers an opportunity for increase in Pak-Iran trade. However, due to continuing American sanctions on Iranian financial institutions, Pakistani banks remain reluctant to do business with their Iranian counterparts. Since the banks provide the most credible mechanism to carry out international trade transactions, the lingering banking issue constitutes one of the most serious obstacles to the bilateral trade.
With an unpredictable Donald Trump calling the shots in the U.S., the fate of the Iranian nuclear deal, and thus Iran's international trade including that with Pakistan, hangs in balance.
Pakistan's businesses, which believe in playing safe, prefer to do business with their counterparts in North American and European countries, which are characterized by political stability and fairly familiar and predictable market behaviour. Hotspots like Iran or the markets like CARs, for which an unstable, and presently unfriendly, Afghanistan provides the shortest transit route, do not hold much of an attraction for them. In a market economy, it's the private sector, not the government, which decides who and how much to trade with.
For both trade-lack of economic integration and little interest of the corporate sector-and non-trade-security, political tensions, international sanctions-reasons, neither the members of SAARC nor those of ECO have been able to set up regional production networks, in an era in which such networks are at a high premium in the rest of the world. The outcome is a Catch 22.