POLICY BRIEF 09-15

India-Pakistan Trade: A Roadmap for Enhancing Economic Relations

by Mohsin S. Khan, Peterson Institute for International Economics

July 2009

Mohsin S. Khan
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Periodic heightened political tensions between India and Pakistan have derailed attempts to improve economic ties and trade relations between the two countries. India-Pakistan trade is unnaturally small, currently about $2 billion per year. Pakistan accounts for less than 1 percent of India's trade, and India accounts for less than 5 percent of Pakistan's trade. Constraints include high tariff and nontarrif barriers, inadequate infrastructure, bureaucratic inertia, excessive red tape, and direct political opposition. Khan recommends that President Asif Ali Zardari and Prime Minister Manmohan Singh, who had their first post-Mumbai attacks meeting on June 16, and are slated to meet again in Egypt in July, should pick up from where former President Pervez Musharraf and Prime Minister Singh left off in their meeting in New Delhi in April 2005. The two governments could start with implementing short-term measures mainly to facilitate trade—such as easing restrictions on visas, opening additional border crossings and road routes, and increasing air links—many of which have already been agreed in principle at the April 2005 Musharraf-Singh meeting. The success of these "confidence building" short-term measures and the resulting growth in trade would encourage the creation of constituencies that would support more far-reaching liberalization of trade between the two countries. Over the medium to long term, Pakistan should grant most favored nation (MFN) status to India, which India already provides to Pakistan, and allow transit trade from India; India should significantly lower tariff rates for goods of particular interest to Pakistan (e.g., textiles) and remove nontariff barriers; and both countries should facilitate trade in energy, information technology, and services, remove obstacles to foreign direct investment flows, and harmonize customs procedures. Improving economic ties may help to resolve the larger political issues that have bedeviled India-Pakistan overall relations for over 60 years.

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