After four armed men attacked an Army camp in Uri last fortnight, India has sought to isolate Pakistan internationally, attempting to convince the world that Islamabad is an exporter of terror. As part of its response to the strike that left 18 soldiers dead, Prime Minister Narendra Modi is reported to be set to have a meeting on Thursday to determine whether India should revoke the Most Favoured Nation status it unilaterally accorded to Pakistan in 1996.
Most Favoured Nation status means that Pakistan must be treated on par with any other country that trades with India.
Withdrawing MFN status to Islamabad could mark an important – even if symbolic – attempt by New Delhi to demonstrate that it is taking tough action.
But it won't have any real effect: volumes of trade between the two countries are too small for sanctions to actually make a difference.
As this chart above shows, India’s trade relationship with Pakistan has been rather bumpy in the last decade. While India’s exports to Pakistan have marginally grown from 0.78% of total exports in 2007-'08 to 0.88% in the year 2015-'16, India’s imports from Pakistan remain negligible at 0.12% of total exports, according to the data for the last financial year.
In fact, Pakistan’s exports to India have shrunk in recent years, according to the Rawalpindi Chamber of Commerce. “Pakistan’s exports to India were 30 per cent of what India exported to Pakistan in 2009 which fell to 24 per cent in 2010 and further shrank to 20 per cent in 2011,” a paper issued by the organisation noted.
Even those who advocate an "economic attack" on Pakistan as a response to the Uri crisis acknowledge that sanctions will hardly have any effect due to Islamabad's low trade volumes with India. "Pakistan’s total import from South Asia itself is less than 4 per cent," noted The New Indian Express. "Hence, India alone imposing economic sanctions will hardly make any difference."
On the other hand, India actually stands to lose from imposing sanctions on its neighbour. As it turns out, India’s trade surplus with Pakistan has grown almost 1.5 times in the last decade, according to the ministry of commerce. By contrast, India’s overall trade balance remains negative and grew 8% wider in the last financial year because the country imports more goods by value than it exports.
Despite the bellicose political rhetoric, the Rawalpindi Chamber of Commerce report went on to explain why it made sense for both the countries to trade more – each can gain from their neighbour's lower costs by importing more than they currently do.
“At a highly dis-aggregated level it was found that there are 2,646 common items of Pakistan’s imports that India exports worth over $15 billion. For half of these items, the unit value of Pakistani imports is more than the unit value of Indian exports. Pakistan can import these items cheaply from India. At the same time 1,181 items worth $3.9 billion are common between India’s imports and Pakistan’s exports. About 70 percent of these common items have unit values less or equal to the Indian import unit value. This suggests that these exports from Pakistan can be supplied to India at a lower cost than what they are getting from other countries.”
Cotton from India accounts for more than one-fifth of all the cotton that Pakistan imports and 16.7% of its organic chemicals come from across the border.
Similarly, India relies on Pakistan for certain items too: 16.4% of India’s imports of fruits and nuts including dry fruits come from its neighbour while cotton and mineral fuels and oil form a major part of India’s total imports from Pakistan.
Any survey of business ties between the two countries needs to look beyond just formal trade. A study conducted by Indian Council for Research on International Economic Relations showed that the value of informal trade between the two countries is almost twice the value of formal trade.
Counting both formal and informal numbers, total trade between the two countries is valued at more than $10 billion, the ICRIER said. Commodities usually traded range from gold, scrap, machinery and electronic items, much of this is routed through Dubai and other third-party countries.
Most residents surveyed said that they prefer to route their trade through the United Arab Emirates to work around high tariff barriers imposed on certain commodities by both nations.
This demonstrates that businessmen aren't allowing political concerns to hamper the opportunity to make money, noted Bidanda M. Chengappa, a senior fellow at the Institute of Defence Studies.
“The Kashmir problem therefore remains a non-issue for business persons who are ever eager to 'capture' new markets and make their cash registers ring,” he wrote. “Importantly, normalised trade between the two neighbours will mean citizens in both countries can get merchandise/commodities at cheaper prices and also enable the governments to earn more revenue in the process.”
He concluded that Pakistani Prime Minister Nawaz Sharif, who is a businessman turned politician, will accord greater importance to maintaining and boosting trade ties with India. “Importantly, India-Pakistan economic relations would kick-start SAARC intra-regional trade and thereby, transform the regional states into a powerful economic bloc," Chengappa noted.
As analysts note, healthy trade relations between the two countries are vital to maintaining peaceful contact and preserving their economies – especially that of Pakistan, they say. “Trade can help ease tension between the two countries and help resolve other important issues,” former Pakistani High Commissioner to India Aziz Ahmed Khan said in December.
At a gathering hosted by Pakistan-India Forum for Peace and Democracy last year, journalist Jatin Desai said that the two countries need to look beyond their rivalries to boost trade.
“India and Pakistan need to realise the fact that their rivalry is affecting smaller countries in the region," he said. " Indirect trade between the two countries is earning traders and small businesses around Rs 2.6 billion. Imagine what a direct trade would do.”Several officials and ministers in Pakistan seem to agree. Recently, Pakistan's former Foreign Minister Hina Rabbani Khar said that increased trade with India is likely to help Pakistan's prosperity, and “put in place the conditions that will enable Pakistan to better pursue its principled positions” on territorial issues.
Meanwhile, a study by US based think tank Wilson Center wrote in a paper in 2013 that Pakistan should look to increase trade with India in order to boost its own economy because the benefits of a bustling economy could help reduce violence.
"Economic hardship is a driver of Pakistan’s widespread violence, yet trade can fuel growth in economically depressed areas. Additionally, economic liberalization can help ease security fears; experts estimate that trade volumes in the $10 to $15 billion range can make trade gains powerful enough to outweigh geostrategic concerns."
