Pakistan has decided to extend “most-favored nation” (MFN) trade status to India. This move has been a long time coming, and offers both countries significant benefits. The most compelling among them, however, is not economic: MFN is as much a confidence-building measure that can lower barriers to more extensive interaction between the two neighbors. Any steps that bring these two countries together are to be encouraged.
India and Pakistan granted each other MFN status when they joined the General Agreement on Tariffs and Trade (GATT) in 1948. This framework governed their economic relations until 1965, despite bloody battles over partition and other issues.
When the World Trade Organization was launched in 1995, India re-extended MFN to Pakistan. Islamabad did not reciprocate as opponents argued that MFN status should be used for leverage in negotiations over the disputed territory of Kashmir.
Plainly, that has not worked. And Pakistan’s economic troubles — the economy is growing at an anemic 3.5 percent, less than half that of India, and the International Monetary Fund has suspended aid because of Islamabad’s inability to honor commitments — have spurred the government to look for new options. Estimates of the annual volume of trade between the two countries range from $1 billion to $2.7 billion; the range suggests that there is considerable illicit trade that could be tapped for revenue, while undermining the argument that withholding MFN is “punishing” India.
There is no doubt about the benefits that would accrue. The two countries’ commerce ministers have said they want to double trade to $6 billion. The World Bank has estimated that bilateral trade could reach $9 billion if all barriers were lifted.
Granting MFN is only a first step; much more has to be done to realize those gains. For example, there is currently only one open border crossing for cargo. Other nontariff barriers include the need for visas, trade financing, cross-border banking transactions, foreign-direct investment regulations and investment flows.
Policymakers are aware of the shortcomings. Officials are hoping that the decision will jump-start discussions on a wide range of issues. Most significantly, deeper trade relations can help tie the two countries more closely together and convince them that tearing down barriers rather than sheltering behind national borders is the best way to secure peace and prosperity in South Asia.
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