Future of Trade

6th December, 2018

The Pakistan At Hundred initiative hosted a panel discussion on ‘The Future of Trade in South Asia' on December 6, 2018. Ms. Nazish Afraz, Adjunct Faculty at LUMS, moderated a panel on the future of regional trade in South Asia. The panel included Dr. Javed Hamid, Professor of Economics at Lahore School of Economics, Dr. Sanjay Kathuria, Lead Economist, Macroeconomics, Trade & Investment, Global Practice, World Bank and Dr. Syed Muhammad Turab Hussain, Associate Professor of Economics at LUMS. The session began with Dr. Sanjay Kathuria going over a recent World Bank report titled “A Glass Half-Full: The Promise of Regional Trade in South Asia” proceeded by the discussion and finally a question answer session with the audience.

“Breakfast in Kabul, Lunch in Lahore, Tea in Delhi and Dinner in Dhaka” is the ideal Dr. Sanjay argues for; showcasing the many benefits of a freer trade practice within South Asia. Currently, it is very difficult to connect different South Asians cities; one cannot seamlessly travel as one can within, for example, the European Union. South Asia is the fasted growing region in the world, however, it is also the most disconnected and disjointed region: trade as a share of regional GDP is less than 1%.

Currently, South Asia’s intraregional trade as a share of total trade is just 5%, the lowest in the world. That leaves significant room for improvement. The World Bank report estimates that the gap in potential is at a staggering $44 Billion according to the gravity model of trade. This gap is most pronounced in Pakistan: Current trade stands at $5.1 Billion with the potential of $39.7 Billion leading to a gap of $34.6 Billion, approximately 51% of Pakistan’s global trade.

This is caused by huge barriers to trade, mainly exceedingly large tariffs, significant trust deficits, connectivity issues and a lack of infrastructure to support trade. According to the Overall Trade Restrictiveness Index (OTRI), South Asian countries across the board are much more restrictive towards each other than with the rest of the world. Perhaps the biggest showcase of this problem is in the fact that the cost of India-Pakistan trade, two neighbors that share a huge border between themselves, is higher than trade between India-Brazil, two countries that are continents apart.

That is not to say that there are not instances of positive relations between South Asian countries. Dr. Sanjay points out two key examples of this: 1. Air Connectivity between India and Sri Lanka has led to a huge increase in tourism and economic benefits and 2. Border Haats between India and Brazil have led to strengthening of trust between the two nations. Kaushik Basu states that “…Cross-Country studies show that nations in which there is a lot of trust among people do well economically.” This is what Pakistan needs to do in the long-run to ensure that it can reap the benefits of open trade.

Dr. Sanjay concludes by talking about steps needed to achieve these broad goals of prosperity within South Asia; putting a focus on taking small steps that lead to a better future: small victories that increase in magnitude with time.

The panel begins with Ms. Nazish commenting on the state of competitiveness of local Pakistani businesses and how opening up trade may harm them. Dr. Javed Hamid argues that the problem between Pakistan-India trade is political in nature and not economic, therefore we need to address it in such a way that we overcome political barriers to economic integration. The political positions that we have taken forego the huge opportunities that exist at our doorstep. There ought to be an extensive study that solely focuses on India-Pakistan trade which looks at the cost, benefit, losses and opportunities between the two biggest nations in South Asia. The first step is to make people aware of the problem, and the second is to reduce, as talked about before, the huge trust deficits that exist. Obviously Pakistan has huge economic gains from opening up trade with India; however, we need to see that India also has huge economic gains to be availed if it opens up trade with Pakistan. Coming to the question of the potential losses to local businesses due to freer trade, Dr. Javed argues that these fears are based more in perceptions than in reality. What we need to do is approach freer trade step-by-step: start with one industry, work out the issues that businesses may have with trade, and sort them out. Then repeat this process and expand as we go along.

Dr. Turab addresses the issue of trust again; the last time the South Asian Economics Meet was held in Lahore was in 2012 where 30 Indian students and faculty came. Today this seems like a different era; that’s the unfortunate reality of Pak-India relations the volatility and unpredictability of it: a few years ago we were on the verge of normalization of trade and now one cannot even get a visa to India. As mentioned before, the problem is political and politics will always trump economics when it comes to these two countries. It should also be noted that the general perception when it comes to Pak-India economic relations is that the stakes are low; policy makers and politicians alike do not realize the huge opportunity cost that is being foregone due to current practices. Seldom do they look beyond formal engagement which is just at $2 billion a year compared to $36 billion that could potentially be reached.
The talk concludes with a positive note and the panelists unanimously agreeing that there is still hope for trade in South Asia, signified by increase in religious tourism in Pakistan from India and the possibility of a similar agreement such as that of border Haats between India and Bangladesh.

You can watch the full lecture by Dr. Sanjay Kathuria and the panel talk on our YouTube channel at www.youtube.com/c/PakistanatHundred