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Trade could turn the tide

The MFN status will create interests that are supportive of better Indo-Pak relations.

india Updated: Nov 04, 2011 03:09 IST

It says something about the state of relations between India and Pakistan that it has taken 15 years for them to agree to grant each other most-favoured nation (MFN) status or, to use the more accurate American nomenclature, normal trading relations. Pakistan has been the obdurate partner in all this.

It declined, in effect, to grant India the same trading rights that were granted to all other countries. Many reasons were cited. These included the political one that India had to first settle the Kashmir dispute before MFN status could be considered. But they also ranged from the economic — that India’s larger economy would bulldoze Pakistan’s — to the linguistic, that ‘most-favoured’ nation sounded too lovey-dovey to sell among Pakistanis.

The question is why Islamabad has decided to grant MFN status at this point. There seems to be a combination of political and economic reasons. The first, and most encouraging, is that the Pakistani leadership’s worldview no longer begins and ends with Kashmir. There is evidence that its fractious relationship with the United States, its obsession with Afghanistan and the simple acceptance that India is too powerful to be coerced into surrendering Kashmir have tempered the original opposition to granting MFN status. The second is that Pakistan’s economic situation has made its business interests more supportive of the idea of trade with India. Pakistan’s largest goods export is textiles and it is easily more competitive in this area than India’s moribund garments sector. On the other hand, India's strong software and services are sectors that barely exist in Pakistan. There are weaknesses in Pakistan’s economy that make trade with India more attractive. Pakistan’s battered public finances remain strongly dependent on customs duties — a state of affairs India escaped thanks to economic reforms. It has found it harder to find new markets for its relatively narrow band of exportable goods — mainly grain, cotton and textiles.

When India and Pakistan gained independence, 56% of Pakistan’s trade was with India. Within a decade, this figure was less than 5%. It is useful to remember that it was not Kashmir but exchange rate squabbles that did the most damage.

Which is why it is important to not assume that MFN status will automatically mean a revolution in political relations.

Germany and Britain had excellent trade relations each time they went to war with each other. However, trade does
create interests that are supportive of good relations. It also furthers mutual understanding. And, in the case of Pakistan, it will provide a fillip to a civil society which is under siege from homebred militants and its own military.