India-Pakistan Political Dispute: Affect on Trade

Bilateral trade between India and Pakistan is one of the greatest missed opportunities in South Asia. In August 2019, Pakistan downgraded diplomatic relations with India and ceased trading altogether. The neighbours have turned their backs on any short-term trade benefits. However, the situation wasn’t always so.

The two countries share a long list of disputes – border control of Kashmir, rights to Indus river water, four wars, financial settlements from the Partition, and most recently, terrorist attacks and counter-offensives. As a result, trade between the two countries suffers. Trade depends on diplomatic and mutually beneficial relations. Political disputes are bad news for bilateral trade.

Latent Potential

The extensively shared land border with road and railway connectivity lends itself to a lot more trade. The shipping routes also contribute. The ports of Mumbai and Karachi are a mere 589 nautical miles through the Arabian Sea, but the political landscape trumps the physical proximity.

Disproportionate costs, trade barriers, high levels of informal traffic, complicated non-tariff measures and a long list of product restrictions are contributing factors. The two countries account for 88% of South Asia’s GDP and 86% of its population. Both would benefit from a renewal of trade ties.

As of 2018, the potential for reciprocal trade between the two Indus valley nations stands at a whopping $37billion, according to a World Bank report. But in 2017-18, the total value of trade between the two was a mere $2.4billion. This volume accounted for a meagre 0.31% of India’s total trade with the world and just about 3.2% of Pakistan’s global trade, points out India’s pink paper The Economic Times. The missed opportunity is massive.

So, why aren’t they trading?

As of mid-2019, tensions are heightened.

In response to the Indian government’s revocation of Article 370 that ended Jammu and Kashmir’s special status, Pakistan severed trade ties with India.

But Pakistan’s radical decisions don’t necessarily put it at the losing end. India surpasses Pakistan’s population by over a billion people. The actual effect of this trade embargo on Pakistan’s economy is insignificant when its GDP per capita comes into play.

The reality is that both countries are not major trading partners for each other. In comparison with their respective global trade, the inter-Indus trade is insignificant.

Pakistan trades heavily with the US, China, Afghanistan and the UK. India, its next-door neighbour, makes number 13 on this list. It also ran a trade deficit with India at a value of $1.6billion at the time of suspension. So, that might be a blow to the economy, but it will only be temporary. At the same time, India trades with the US, UAE, China and Singapore. Pakistan doesn’t even make its top 15 trading partners.

India is the rising star of Asia. With the highest rate of predicted GDP growth, rising middle class and smartphone penetration, it should be the go-to destination for any trading partner. India is providing impetus to its economy to deliver on growth predictions. It is busy forging new partnerships with other Asian countries while Pakistan is focusing on strengthening ties with the middle east.

One thing is for sure, if the two countries were to set their differences aside and resume trade, they would both walk away as winners.