SPY EYES

For many analysts and policymakers, Pakistan’s decision to grant Most Favored Nation (MFN) status to India earlier this month appears to be a major breakthrough in India-Pakistan trade relations. Under the MFN clause, all members of the World Trade Organization (WTO) are obliged to extend trading benefits to a country that are equal to those accorded to any other country. While India accorded Pakistan MFN status in 1996, Pakistan’s decision to reciprocate has only come 15 years later.

Perhaps what has gone unnoticed by the world at large, however, is the unprecedented pace at which theEconomic and Commercial Cooperation talks between India and Pakistan, which resumed in April and picked up again this week after a hiatus of three years, have proceeded. While India was keen on Pakistan granting it MFN status, the latter’s major concern was that India should remove all non-tariff barriers that impede its market access into the Indian market. And a key feature of these talks has been that timelines have been specified for every item on the agenda. In particular, the April agenda stated that Joint Working Groups to address non-tariff barriers should be set up by August 2011, and that MFN status to India should be accorded by October 2011. Both conditions that have now been satisfied.

Under the extant bilateral trade arrangement between the two countries, Pakistan permits the import of only 1934  items from India, known as a ‘positive list’ approach to trade limitations. Following the Pakistani federal cabinet’s decision to grant MFN status to India there were three major concerns about its implementation process. First, the time period within which the shift from a positive to negative list (whereby the list contains specific banned, rather than permitted, items) would take place was not stated. Second, Pakistan has maintained a separate positive list for the road route between the two countries at the Wagah border crossing, where only 14 of the 1934 items on the overall positive list are allowed to be traded; analysts doubted whether this extra barrier would be rectified. And third, Pakistan has yet to meet its obligations under the South Asian Free Trade Agreement (SAFTA), under which members agreed to offer preferential access to other members by reducing tariffs within a specified timeframe.

The Joint Statement issued following the conclusion of talks on Wednesday addresses all of these concerns. First, it lays down the sequencing and timelines for the move towards full normalization of trade relations. In the initial stage, Pakistan will make a transition from the current ‘positive list’ approach to a small negative list of banned items to be finalized and ratified in February 2012. In the second stage, the negative list will be phased out by the end of 2012. The new trading regime will also be applicable to all trade that goes overland between the two countries at the Wagah crossing, after the new infrastructure at the land border is complete, with the announcement of this change timed to coincide with the release of goods on the negative list. Both sides also agreed to move towards enhancing the preferential trading arrangements under the SAFTA process, and they also agreed to designate officials on both sides to work on this issue. If these timelines are met, there will be no contentious issues left with regards to the MFN status.

The Joint Working Group to address non-tariff barriers was also set up as scheduled following the April talks. The Pakistani side specified the non-tariff barriers they wanted to see removed as perceived by their business community. The identified barriers were related to complex and lengthy visa procedures in India and the lack of awareness on the part of Pakistani business and government authorities of Indian regulations and licensing requirements for a range of products. Subsequently, in September 2011, the Indian government arranged an interactive session between Pakistani business people and Indian regulators. Further clarifications were sought by the Pakistani side at the November meeting, where Indian regulators provided information to the Pakistan delegation on the regulatory regimes in India and clarified that the non-tariff measures applied to Pakistan were non-discriminatory. It was also decided that the Indian side would send its regulators to Pakistan in March 2012 for meetings with members of the Pakistani business community. Again, these measures are being taken within a very short time span, under pre-determined timelines. The business-to-business and government-to-business interaction is an innovative, yet simple, method of addressing information gaps on the business environment between the two countries. This not only serves as a powerful confidence building measure, but is also an effective way to facilitate further trade.

Between April 2011 and November 2011 tremendous ground has been covered to address a series of previously difficult issues. The adherence to all timelines set for every aspect on the agenda is unprecedented, surpassing the pace set in past trade negotiations either country has had with other nations. The most tangible decision was regarding the MFN status, as it required an approval from Pakistan’s federal cabinet. This timely decision has restored confidence in the government and business communities in the two countries. There is little doubt now that the blueprint laid out on implementation of the MFN will be carried out as scheduled.

One major unresolved problem is related to visa restrictions, which fall within the realm of non-tariff barriers. Even though the bilateral visa regime is reciprocal, it is widely believed that India’s is far more restrictive. Granting city-specific visas, requiring people to report to local police stations on arrival and before departure, requiring exit from the port of entry, and delays in granting visas are some of the restrictions that limit market access for aspiring traders. In October 2011, the two sides finalized the draft text of an agreement  for streamlining visa procedures, for submission to their respective governments. The contours of the agreement are not known yet, but is expected to be signed in December. But at this point, given all of the other developments in the trading realm, it is impossible to be pessimistic about a substantial improvement in the visa regime.

Easing or eliminating these non-tariff barriers would not only lead to much higher levels of trade, but would also serve as a powerful means for conflict resolution, further forging connections and interactions between Pakistan and India. The goal set by the two countries to an eventual complete normalization of trade now appears to be — for the first time in the difficult and painful history of trade relations between India and Pakistan — well within  reach.