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Improvement in Indian-Pakistani trade ties bodes well for resolving conflict in South Asia

by Harsh V. Pant

Special To The Japan Times

The summit meetings of the South Asian Association for Regional Cooperation are not the most exciting of gatherings and for years SAARC has been known for not delivering. But the latest summit held in the Maldives will be remembered, not for any substantive achievement of SAARC itself but for the fact that Indian-Pakistani ties achieved a level of stability not in evidence in recent years.

Though the meeting of the prime ministers of India and Pakistan has been a bit overshadowed by the controversy over Manmohan Singh calling his Pakistani counterpart Yousaf Raza Gilani a “man of peace,” the two leaders did take a number of steps that bode well for the future of their bilateral tries.

Declaring that the time has come to write a “new chapter” in the history of two countries, New Delhi decided to move toward a preferential trade agreement with Pakistan under the conditions for the South Asian Free Trade Area, which is supposed to lead to zero customs duties on all traded goods by 2016.

The agreement on SAFTA was reached at the 2004 SAARC summit. It created a free trade area of 1.8 billion people in Bangladesh, India, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.

The two states also decided to put in place a liberalized visa regimen to be negotiated at the earliest and revive the Indo-Pak joint commission that has not been in operation since 2005.

Bad news from South Asia seems to be a regular phenomenon these days, dominating news cycles for years now. So when some good news emerges, it takes a while for it to sink in.

Amidst a failing war in Afghanistan, growing Islamist extremism, a doddering institutional fabric in Pakistan, a surprise has sprung up — India-Pakistan ties have taken a turn for the better in recent weeks. Last month, Pakistan’s military speedily acted with remarkable restraint to return to the Indian military a helicopter that had inadvertently crossed the Line of Control.

Meanwhile, India has supported Pakistan’s bid for a nonpermanent seat on the United Nations Security Council with Pakistan responding by supporting India’s nominee for the post of secretary general of the Commonwealth.

But much more significantly, Pakistan has finally decided to grant Most Favored Nation (MFN) status to India after years of failing to reciprocate India’s decision to do the same in 1996.

This is clearly not a radical decision. Under the terms and conditions of the World Trade Organization, member states are supposed to bestow MFN status on each other so that there is no discrimination and all states can benefit equally from the lowest possible tariffs.

Yet, the move by Pakistan is politically significant as the Pakistani government seems to be signaling that it is indeed serious about the dialogue process that has been resumed after a gap of three years.

India ceased all dialogue with Pakistan after the terror assaults on Mumbai in November 20001, which had vitiated the bilateral atmosphere to an unprecedented degree. Both New Delhi and Islamabad have realized that a lack of dialogue between the two neighbors is becoming counterproductive. And so the latest move by Pakistan should be seen as symbolically important.

For the last 15 years, Pakistan has linked the MFN issue with the contentious issue of Kashmir and, in the absence of MFN status with India, around 20,000 Indian export items to Pakistan have been routed through a third nation.

With the granting of MFN status to India, it has been estimated that the bilateral trade could jump to $8 billion from the paltry $2.6 billion at present over the next five years. This makes this move an important confidence-building measure that will allow the two sides to take their dialogue forward on other more contentious issues.

Islamabad announced its decision suggesting that “all stakeholders, including our [Pakistan's] military and defence institutions, were on board.”

India, not surprisingly, welcomed the decision, arguing that “economic engagements, trade, the removal of barriers to trade and facilitating land transportation would help the region.” For some time now, there has been growing support in Pakistan for normalizing trade ties with India.

When Asif Ali Zardari became the President of Pakistan in 2008, he articulated the need for greater economic cooperation with India but was rebuffed by the all-powerful military.

As the ground realities in South Asia have rapidly evolved in the last few years, Pakistan is under tremendous pressure to prove its credentials as a responsible regional player in light of the crisis in Afghanistan and rapidly deteriorating internal security situation. Pakistan’s economy is in a parlous condition with growth down to 2.4 percent in the last financial year.

After Islamabad declined to pursue the advice of the International Monetary Fund to expand its tax base in March 2010, the fund decided to suspend disbursement of its $11 billion facility.

Pakistan’s ties with the United States have deteriorated sharply since May this year, when the U.S. Navy Seals killed Osama bin Laden in Abbottabad, Pakistan. Pakistan had hoped that China would fill the void, but China has been reluctant to take on the mantle of its savior.

The Obama administration’s decision to suspend a portion of American aid to the Pakistani military has led to many in Islamabad to become even more forceful in underlining Beijing’s importance for Pakistan.

Reacting to the U.S. move of cutting aid, Islamabad’s ambassador to Beijing, Masood Khan, was quick to suggest that “China will stand by us in difficult times as it has been doing for the past years.”

But Chinese involvement in Pakistan is unlikely to match the U.S. profile in the country in the short to medium term, and it is not readily evident if China even wants to match the U.S. in this regard. This has led Pakistan to explore new foreign policy options and a more pragmatic approach toward India is the outcome.

Normalizing trade relations with India allows Pakistan to not only garner economic benefits from one of the world’s fastest growing economies but also to alter the impression of being the perpetual troublemaker.

The decision to grant MFN status to India has provoked objections in Pakistan with some business groups, especially the pharmaceutical industry, raising the specter of Indian goods flooding the Pakistani markets.

India should now be large-hearted and open up its market for Pakistani exports. India-Pakistan ties that have been the cause of the failure of most of these summits suddenly appear to be on firmer footing than many might have anticipated just a few weeks back.

As a result, the prime ministers of India and Pakistan have decided to take these positive atmospherics forward by making some bold moves.

These latest moves are unlikely to resolve the fundamental conflict between the two rivals, but it is a start and the two sides should build on this so as to contribute to lifting South Asia from the morass of long-standing conflict.

Harsh V. Pant, a professor of defense studies at King’s College, London, writes on South Asian relations.