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Billions Lost in Smuggling: Why Normalizing Trade Between Pakistan and India Makes Sense

Recent developments hint at a possible improvement in trade relations between Pakistan and India. Although the relationship between the two countries has historically been volatile, it took a significant hit after the events of 2019. The Pulwama attack led to heightened tensions, and India’s subsequent revocation of Jammu and Kashmir’s special status in August further strained formal trade ties.

Following these events, India imposed heavy tariffs on Pakistani imports and halted trade across the Line of Control. In response, Pakistan banned trade with India, only allowing the import of essential pharmaceuticals. This led to a massive drop in formal trade between the two nations.

However, the recent exchange of congratulatory messages between the newly elected prime ministers of Pakistan and India on social media has raised hopes for a possible thaw in relations. Deputy Prime Minister Ishaq Dar has also voiced support for normalizing trade relations with India.

The volume of informal trade between the two countries underscores the potential benefits of normalizing trade. Estimates suggest that billions of dollars flow between Pakistan and India through smuggling and rerouting via hubs like Dubai. Former Federal Board of Revenue chairman Shabbar Zaidi estimates that smuggling alone is worth $1.5-$2 billion annually, with another billion dollars added through rerouting via Dubai.

Payments for this informal trade are often made through hundi/hawala channels, and there are allegations that border security forces might be involved. Smuggled goods include livestock, betel nut, and tobacco products from India, while rock salt and dried fruit from Afghanistan cross into India through Pakistan. The robust informal trade network highlights the potential economic benefits of normalizing formal trade relations.

Former finance minister Miftah Ismail argues that all trade is beneficial, especially given the proximity of Pakistan and India. He points out that despite political disputes, countries like China and Taiwan, as well as India and China, continue to engage in substantial trade. For example, China and Taiwan’s bilateral trade exceeds $250 billion, and India’s trade with China amounts to $117 billion in 2023.

Ismail says that stopping trade with India has not helped Pakistan’s political goals. A strong economy would let Pakistan speak up for Kashmir more effectively. But even if they trade with India, it might not immediately boost Pakistani exports. Indian buyers have been hesitant about products labeled “Made in Pakistan.” Plus, India has put up barriers against Pakistani exports before. Still, some Pakistani goods, like dry dates and designer suits, were popular in India before the trade ban in 2019. Now, those garments have to go through Dubai instead.

Imports from India could also benefit Pakistani businesses. Almas Hyder, former president of the Lahore Chamber of Commerce and Industry, suggests that importing machinery and raw materials from India could save significant costs. Importing from India could reduce freight costs from $3,000-$4,000 per container to just $300-$400.

Given the example of the Free Trade Agreement with China, which led to a trade imbalance favoring China, Hyder argues for careful negotiations to ensure mutual benefit in a trade agreement with India. A comprehensive trade agreement should include dispute resolution mechanisms, optimal banking channels, and clear guidelines for both government-to-government and business-to-business transactions.

The current trade agreement, the South Asia Free Trade Area, is considered outdated and in need of renegotiation to address contemporary trade challenges and opportunities. By adopting a new trade framework, both Pakistan and India could unlock substantial economic benefits, reduce smuggling, and foster a more stable and prosperous relationship.

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