INSIGHT: Nuclear foes India, Pakistan agree trade liberalisation

21 November 2011 15:50  [Source: ICIS news]

By Tahir Ikram

The floodlit border between India and Pakistan as seen from spaceSINGAPORE (ICIS)--Pakistan has finally decided to ease trade with its arch-rival India, which may lead to a rise in bilateral trade to $6bn by 2015 from an estimated $1.73bn in 2011, with the petrochemical sector also experiencing an increase, according to officials from both countries.

Islamabad announced on 15 November that by February 2012 it will allow Indian products freely to enter Pakistan, with the exception of a few categories.

This is a reversal of its previous position, where only a few categories of products were allowed to be imported from its eastern neighbour.

The “negative list” of items that India will initially be restricted from trading includes those from the pharmaceutical and engineering industries, while no such ban on petrochemicals has been announced.

The move is part of the normalisation of political and economic relations between the nuclear-armed neighbours, who have fought three major wars and held innumerable armed clashes since gaining independence from the UK in 1947.

In a rare move, Pakistan’s cabinet announced last month it has in principle approved to grant India "most favoured nation" (MFN) status, reciprocating New Delhi's decision to grant Islamabad the status in 1996.

However, Pakistan says it has not really benefited from the status because of strict Indian customs rules and quality standards.

The establishment of trade ties is expected to promote peace between the two countries.

The Pakistani cabinet’s unanimous decision was hailed as a “very, very big deal” by US State Department spokeswoman Victoria Nuland, who told reporters it “sets the kind of example” that other countries in south and central Asia should follow.

Giving MFN status to India will remove specific tariff and non-tariff barriers from India and Indian products will be treated in the same way as imports from other countries, according to Furqan Punjani, an analyst with Karachi-based brokerage house Topline Securities.

Trade between India and Pakistan has previously been held hostage not just to tariff barriers that the countries placed on each other’s products, but also to the absence of direct trade through land and sea routes because of deep political distrust between New Delhi and Islamabad.

“We have turned the corner,” Reuters quoted Pakistan’s trade secretary Zafar Mehmood as saying at a joint news conference with his Indian counterpart in Delhi on 15 November.

“We are talking of a complete normalisation road map,” he added.

The two countries’ trade secretaries agreed Pakistan will replace a limited list of items that India can sell across the border with a short list of items that cannot be traded, according to the minutes of the meeting, Reuters reported.

“At a broader country level, we fully support opening trade with India and believe that it will benefit both countries,” Asif Saad, the CEO of Lotte Pakistan PTA (Lotte PPTA) told ICIS.

Lotte PPTA already sources a portion of raw materials from India for its purified telepathic acid (PTA) plant.

Pakistan is a net importer of petrochemicals such as paraxylene (PX) and PTA, and if trade between the two countries is liberalised, Pakistan will benefit as a result of lower freight costs from India compared to South Korea and Taiwan.

A potential trade route is over the Wagah border between the two countries, near the eastern Pakistani city of Lahore.

This would allow India a much sought-after direct road link to war-torn Afghanistan, which is completely dependent on imports.

Some Pakistani businessmen, however, are concerned that a considerably larger Indian industry may overwhelm the comparatively small Pakistani industry.

“We must carefully analyse sector-wise differences and understand that we will be losers in some areas and winners in others,” Saad said.

Pakistan does not have a well-developed petrochemical industry compared to India and local producers were disadvantaged because of government policies, Saad added.

“Take the case of PTA – the product that our company produces and markets. The import tariff on PTA in Pakistan is 3% compared to that in India, where it is 5%,” Saad said.

“This means that at the same international price, our product for Indian consumers will be more expensive than Indian product for Pakistani consumers,” Saad added.

“Furthermore, if they have a PTA plant close to the Wagah border, they can supply the product via the land route, [which is] much cheaper than from Karachi,” he said.

The southern port city of Karachi is much further away from the central Punjab province of Pakistan than is the Wagah border.

As a result, the company has requested that the Pakistani government increase the import tariff on PTA – something it has been “pleading” for over the past year – and allow PTA imports from India only via sea, which will bring the countries to an even level, Saad said.

Read John Richardson's and Malini Hariharan’s blog: Asian Chemical Connections

By: Tahir Ikram
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