Sunday June 16, 2024

Trade with India

From the point of view of economic analysis and historical experience, this assumption is deeply flawed

By Javid Husain
May 30, 2024
Border personnel of India (L) and Pakistan can be seen in this undated image. — Reuters/File
Border personnel of India (L) and Pakistan can be seen in this undated image. — Reuters/File

Trade with India is a hot topic confronting Pakistan’s current leaders and policymakers. Several prominent Pakistani policymakers, business owners and analysts have publicly called for the resumption of full-fledged commercial ties with our eastern neighbour.

However, most of these advocates of a liberal trade regime with India fail to consider its likely negative impact on the overall state of Pakistan’s economy, especially its agriculture and manufacturing sectors, economic autonomy, and security.

The standard arguments in support of free trade are often cited by these analysts in calling for a liberal trade regime with India with the conclusion that such a trade regime would work to the advantage of both sides. From the point of view of economic analysis and historical experience, this assumption is deeply flawed.

Free trade may work to the advantage of both sides over time in conditions of perfect competition where the participating parties are at the same stage of development. In the actual world, market conditions are far from perfect, thereby preventing the percolation of the full advantages of free trade to all the trade partners equally. In addition, bigger countries in terms of the size of their economies and populations tend to dominate smaller countries economically because of the inherent advantage of the economies of large-scale production.

Further, in accordance with the principle of social and cumulative causation propounded by famous Swedish economist Gunnar Myrdal, the economically advanced member states tend to benefit more from the process of free trade and economic integration compared with the less-developed members if the matters are left to the market forces alone. The likelihood of this development calls for special measures to ensure that the less developed member states are not left behind in the race for economic growth.

Historical experience supports these conclusions with far-reaching implications for the formulation of a country’s external economic and commercial policies. In the 19th century, Britain was far ahead of its colonies in Asia and Africa technologically thanks to the Industrial Revolution. Free trade with the colonies worked to its advantage enabling it to plunder their wealth through the mechanism of trade, virtually turning them into suppliers of raw materials for British industries.

Interestingly, the proponents of free trade in the Western world are now making a beeline to Beijing virtually to beg it to curtail its exports to save industries in the West from collapse in the face of tough competition from China. The weekly ‘Economist’ in its issue of April 6 notes: “America will surely block advanced imports from China, or those made by Chinese firms elsewhere. Europe is in a panic about fleets of Chinese vehicles wiping out its carmakers.” Pakistan’s own experience in signing free trade agreements has been far from a happy one as in some cases they have resulted in the flooding of imports, to the detriment of local industries.

The claimed advantages of free trade have also not prevented the US from levying high tariffs on imports from China or blocking the exports of sophisticated technologies to China in the interest of its security and the health of its economy because of the growing US-China rivalry. Therefore, considerations of geopolitics are closely intertwined with the management of America’s external trade and economic relations.

This conclusion also puts paid to the argument that geoeconomics can override or ignore geopolitical compulsions. As the growing US-China rivalry demonstrates, in any conflict between geoeconomic and geopolitical considerations, the latter will always prevail.

We should also be aware of the dangers of exaggerating the advantages of geoeconomics, which basically calls for leveraging a country’s geographical location for beneficial economic interaction with regional countries.

The promotion of regional trade and economic connectivity can indeed work to the advantage of the participating states in a scheme of regional economic cooperation as demonstrated by the successful evolution of the EU over the past seven decades since the Treaty of Rome in 1958. Such a scheme of economic integration in South Asia would not succeed because of the lack of its essential prerequisites such as a community of interests or a feeling of common destiny, economic complementarities, cultural affinities, non-existence of serious disputes among member states, and the absence of hegemonic designs on the part of India.

These deficiencies would turn a South Asian economic union into an instrument for India to dominate the region economically and in due course politically because of the close link between economic and political decisions. However, Saarc does offer useful opportunities for promoting limited cooperation among member states in economic, commercial and other fields at the regional level. It is in our interest to take advantage of those opportunities bilaterally or at the regional level while safeguarding our political independence, economic well-being and autonomy, cultural identity, and national security.

Pakistan’s trade with India, whenever it resumes, will offer some benefits for the two countries per the principle of comparative advantage. A limited dose of competition at this stage of our development may even help in improving the efficiency of the various sectors of our economy. However, as the foregoing analysis suggests, such trade must be closely monitored and regulated by the Pakistan government to ensure that its beneficial effects are maximized while strengthening the health of our economy, especially our agriculture and manufacturing sectors, ensuring our economic autonomy, and safeguarding our national security.

We should never forget in the management of our trade with India that it poses a long-term threat to our national security because of its hegemonic designs in the region, the growing sway of Hindutva, and the outstanding Pakistan-India disputes. Therefore, we should avoid putting ourselves in a position where we are over-dependent on India for imports which are critically important for our national security or economic growth and prosperity.

The writer is a retired ambassador and author of ‘Pakistan and a World in Disorder – A Grand Strategy for the Twenty-First Century’. He can be reached at: