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February 10, 2015

Tea leaves for tanks

A review of Tea Leaves for Tanks: Study of Trade Links, Peace and Perceptions in Pakistan, India, Afghanistan and Iran.

Over the past year, India’s strategic environment with regards to Pakistan has deteriorated considerably. The diplomatic standoff between the two nations has been coupled with major unrest within Pakistan, both political and security wise. To add to the insecurity, the US withdrawal from Afghanistan is leading to resurgence in insurgency in the region.

Olaus Magnus Historia om de nordiska folken

In the midst of India’s efforts to address these security challenges through traditional means, comes an interesting new study that highlights shifting ground realities within Pakistan that could make this the opportune time for India to pay attention to trade as a means of increasing interdependence and leverage for peace in South Asia.

The paper by the Oslo-based Center for International and Strategic Analysis examines in detail the size and attitudes of the business and official community within Pakistan, towards the institutionalisation of trade with India, Afghanistan and Iran. While the report does not thoroughly examine trade related statistics using a substantial number of interviews, it provides primary research and insight into narratives, which are nonetheless original and valuable.

A key conclusion of the paper is that informal trade is the dominant form of trade for Pakistan, not just with India but also with Afghanistan and Iran. In fact, informality is a far more acute problem for the latter two countries. The informal trade between Pakistan and Afghanistan, in particular, is estimated by the authors to be extremely large and multi-sectoral, from Afghanistan being the largest market for agricultural produce and medicines for Pakistan, to the largest supplier of smuggled cars.

Deterrents to formalisation vary marginally from country to country. Regarding India, the Pakistani business community across sectors expressed concerns about high non-tariff barriers in India, as well as fears about being uncompetitive in the Indian market. With respect to Afghanistan, intricate bureaucratic red tape on both sides has driven the bulk of the trade to informal channels, especially through familial links across the border. Trade with Iran is evidently more deeply hostage to geopolitics. In the 1960s-70s, Iran was seen as Pakistan’s strategic depth against India, not Afghanistan, and trade prospered. However, the larger relationship became tense with increasing US and Saudi influence in Afghanistan and Pakistan from the 1990s. Currently, trade is limited to a few items and apart from the traffic of illegal oil from Iran; the business communities of both countries express limited interest in expanding opportunities.

A key takeaway from the paper is that no matter how much blame may be ascribed to its neighbours, the largest deterrent to trade formalisation is the Pakistani military and government itself. The dominance of informal trade is an outcome of the lack of trust of the business community in the state. Formal trade is, seen as less transparent and reliable than informal trade. An oft-articulated grievance is the unresponsiveness of the Pakistani government and bureaucracy towards trade facilitation. An example of such mis-governance was when a truck carrying goods from Pakistan to Afghanistan was asked to pay a fine that was greater than the entire valuation of goods being carried! Similarly, on trade with India, traders consider the fear of adverse policy design by the Pakistani government, made without any consultation with the stakeholders, to be as real and severe as India’s non-tarriff barriers.

The one institution posing the most resistance to trade formalisation is, of course, the Pakistani military. It is the military’s calculus that distorts gains from trade, making them hostage to larger strategic gains or losses. The authors highlight how most of the resistance to trade with India comes from sectors close to the military, even though a large part of the business community has mentally de-linked trade from the Kashmir issue and expresses frustration that economic issues are hostage to geopolitics. The military has also linked trade negotiations to larger strategic concessions from India. Even studies that highlight gains from trade for the military-industrial complex of Pakistan have had no impact in changing the military’s calculus, as war with India is the greatest source of their power and legitimacy. For a different calculation, the military has also has blocked trade formalisation with Afghanistan – they control the bulk of the informal economy and wish to protect their gains.

An evident conclusion from the paper is a clear lack of strategic thinking within Pakistan with regards to leveraging economic hard power. Without considering gains for Pakistan as a whole, trade, that could have increased Pakistan’s penetration and influence in the region, is forsaken for narrow military gains that might arguably do less to enhance national power. This is even more apparent in the author’s account of Afghanistan, than India. Pakistan has clear advantages in the Afghan market – proximity, an Afghan preference for Pakistani goods, ethnic linkages that build trust. However, the strategic thinking on Afghanistan is limited to leveraging the ethnic card to prevent Afghanistan from drawing closer to India. There is little thinking around bilateral gains from trade and goodwill from the Afghans, and this manifests in poor infrastructure and bureaucratic hurdles that slow down even informal trade.

While the strategic calculus of the military is becoming narrower, the authors highlight that neoliberal tendencies are growing in the region. Trade is becoming more important to these countries, while Pakistan is losing out on its advantages of connectivity, ethnicity and so on by keeping formal trade underdeveloped. While Pakistan limits itself with strategic blinders, India can strengthen her influence by deeper integration through trade.

Opportunities for India to deepen trade with the other countries will be the subject of subsequent articles. However, one insight the study clearly shows is the changing attitude of Pakistan’s business community towards India. The authors study the four sectors most opposed to granting India Most Favoured Nation (MFN) status – agriculture, pharmaceuticals, auto and textiles – and demonstrate that opposition is much more fragmented than it appeared. For example, in the auto industry, the auto part traders are keen on liberalisation but manufacturers are not due to fears of uncompetitiveness. Across sectors, a conclusion made by the authors is that it is primarily the uncompetitive segments within an industry that oppose liberalisation, a majority is quite keen to increase trade to cut costs, access India’s markets etc.

Given this fragmentation, some European countries have started funding studies such as this one, to understand how the stakeholders in support of for liberalisation can be supported and how India-Pakistan trade can be increased. There is deep concern amongst these countries that India-Pakistan rivalry can derail all the progress made in Afghanistan over the last decade. Similarly, it would be in India’s interest to understand the motivations of these stakeholders and perhaps, strengthen the pro-India voices.

Dialogue between the Indian and Pakistani business communities appears successful in turning around trade skeptics in Pakistan. The “trust gap” between India and Pakistan appears to be successfully overcome, at least in trade, by dialogue between the stakeholders. The study discusses the success of the India-Pakistan Joint Business Forum established in 2012 in changing the outlook of Pakistan’s agriculture lobby. By debating sophisticated mechanisms like setting up time schedules for trade that protect domestic markets from flooding and establishing trigger mechanisms on shortage and pricing, the forum has created some more optimism within the agriculture industry, which is now looking with some interest into Indian investment. The authors also highlight how such investments are being siphoned off to religious organisations in the absence of opportunity. Indeed the Jamaat-ud-Dawaa has its main support base in traders and agriculturists.

In conclusion, trade offers a strong opportunity for regional integration and leverage for India, especially given Pakistan’s limited initiative in pushing for deeper trade. By understanding the fragmented nature of stakeholders, it would be beneficial for India to consider boosting advocacy for trade liberalisation within Pakistan.

Photo: Wikimedia commons


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