In today's Finshots we talk about trade relations between India and Pakistan and why it's been so difficult to normalize relations in the recent past.

The Story

Cotton and Textile Industries are indispensable to Pakistan’s cause. They make up close to 60% of the total exports and contribute 8.5% to the national GDP. However, lady luck hasn’t been too kind to our neighbour and the country’s cotton mills have suffered quite considerably in the recent past. Heavy monsoons and pest infestation have ravaged the cotton mills and it has created a crisis of sorts for textile manufacturers. They simply haven’t been able to source cotton at competitive rates and have had to rely on imports from faraway countries. It was an expensive affair and it took months for the cotton to reach Pakistani shores.

The best solution at this point in time would have been to turn to India. India would have offered the best prices for raw cotton considering we are the largest cotton producer in the world. And we would have been able to offer a ridiculous bargain on these shipments since we are practically next door. But Pakistan didn't turn to us because they had suspended trade and diplomatic ties with India in 2019 after we revoked Kashmir’s special status. We obviously did the same and the status quo persisted until another problem began cropping up across the border.

Pakistan has also been battling with inflation of late. Electricity prices are on the rise. Gas prices are on the rise. Prices of staple food items are on the rise. It’s getting really bad. In fact, their finance minister was only recently sacked after the government failed to curb inflation and the country’s policymakers have been desperately trying to find a way to better their economic prospects.

To this end, they’ve also been trying to engage with India hoping imports from our country (including sugar and cotton) would help alleviate some of these problems. And we seem to have been responding in kind. But then, just before it seemed like trade relations would finally normalize, everything changed.

But before we get to that, some extra background on trade and Pakistan.

For starters, you have to remember that the suspension of Article 370 isn’t the only reason why trade with Pakistan has taken a backseat. Our transportation linkages are broken. Railways and road connections are inadequate. Sea shipments are constrained by limited port facilities and government regulations act as bottlenecks. So it’s not just the border dispute that’s holding us back. There’s a whole lot more going on in the background and as a consequence, trade with Pakistan amounts to less than 1% of all business we conduct with other countries put together. But that doesn’t mean nobody’s impacted either. We still do some business with Pakistan and most trade engagements happen across land borders facilitated by small-time traders, labourers, drivers and porters. So whenever trade relations fall apart, it’s these marginal communities that suffer the most. And some argue that it’s a needless constraint.

However, the counter-argument is that normal trade relations can only persist when Pakistan toes the line. And since we constantly feel let down by the country’s rhetoric, some people would argue that it’s impossible to do business with Pakistan.

But there is another view — a view that most people don’t subscribe to. It goes something like this — “People resort to conflict when they have nothing to lose. And countries much like people don’t have a lot to lose when things escalate.  Unless that is — they are mutually dependent. For instance, countries that trade aggressively with each other are less likely to go to war. If they still pursued their ambitions despite the interdependence, it would hurt their economic prospects considerably. So the likelihood of any one country antagonising the other is fairly slim.”

Unfortunately, as we already pointed out India and Pakistan aren’t mutually dependent in any meaningful manner. We don’t do a lot of business together. And so there are people who would argue that better trade relationships would inevitably deter both parties from escalating matters. Maybe we could finally have peace. But for that to happen, both parties must be on the same page. And they must act with courage especially in the face of intense public scrutiny. However in this particular case, soon after the Pakistani government’s economic coordination committee announced that import permits would be approved, the Pakistan government made a swift U-turn after receiving backlash from the people and the opposition. One minister noted that they have now deferred plans to normalize relations until India restores Kashmir’s special status.

So yeah, trade relations are likely going on the backburner once again and now you know why.

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