Published: The NEWS, Pakistan, May 28, 2006

By Pradeep S Mehta and N C Pahariya

Regional trade agreements have historically played a positive role in reducing conflicts and hostilities among their member countries. Should Safta be any different?

“A Free Trade Union, comprising the whole of Central, Eastern and South-Eastern Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt and India, might do as much for the peace and prosperity of the world as the League of Nations itself.” John Maynard Keynes, 1919

Trade and commerce have been the most effective way of establishing peace between rival nations. History offers great many examples to support this viewpoint.

The Second World War witnessed the worst enmity between the Allied forces led by Great Britain and the United States, on the one hand, and the Axis powers, led by Germany, on the other. It took several decades after the war to mend relations between the people of these countries. But as soon as the European Union was formed, the situation started changing dramatically. The union gave rise to higher levels of economic well being resulting from enhanced economic cooperation and was instrumental in reducing the enmities and the memories of the atrocities of the World War II in the minds of most people especially the next generation that came of age by the 1970s.

Famous economist Wilfred Pareto (1889) wrote, “customs unions and other systems of closer commercial relations (could serve) as means to the improvement of political relations and the maintenance of peace”.

History provides ample evidence that no neighbouring countries have ever survived and progressed on prolonged belligerent relations. The drive for economic integration often begins with political objectives. The newly established democracies of the Southern Cone — following the example of France and Germany which laid the foundation stone of EU in 1950s — formed Mercosur in the mid-1980s hoping to dampen traditional military hostility between major regional powers: Argentina and Brazil. Southern African Development Community (SADC) originated in the 1980s as a coalition opposed to apartheid in South Africa and has more recently turned to creating a free trade area. Some observers note that African customs unions and free trade areas are as active in conflict resolution as in trade liberalisation. Finally, many see relaxed tensions between India and Pakistan as the real payoff from the Safta agreement.

Regional Trade Agreements (RTAs) can also provide institutions and a forum for bargaining and negotiations to address tensions before they erupt into conflicts. European integration, Association of Southeast Asian Nations (Asean), and Mercosur are often used as venues for improving political-military relations.

Many current studies also point out that RTAs that expand trade flows appear to have a substantial dampening impact on conflict. Mansfield and Pevehouse in a 2000 study have attempted to identify empirically the role of RTAs in ameliorating conflict. They found that, on an average, the likelihood of the outbreak of a militarised interstate dispute declines by around 50 per cent if the states belong to the same RTA. Only RTAs that expand trade flows, however, appear to have a substantial impact on conflict. In Africa, for example, RTAs that address the management of cross-border resource issues (such as water) are more effective in reducing military conflict than other RTAs.

In a similar vein, the formation of South Asian Free Trade Area (Safta) between India and Pakistan along with five other South Asian nations (Bangladesh, Nepal, Bhutan, Maldives and Sri Lanka) may provide a life-time opportunity to forge sustained peaceful political and economic relations between the two nations based on mutual respect and cooperation much similar to what the European nations have developed under the umbrella of the EU.

But first a bit of history. South Asian Association for Regional Cooperation (Saarc) was formed by seven South Asian countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka) in 1985 for increasing political-economic cooperation. Over time, the economic focus of Saarc was gradually sharpened leading to the signing of the South Asian Preferential Trade Agreement (Sapta) in 1995. Nothing substantial happened for a lot of years but talks continued nevertheless, ultimately resulting in the signing of Safta in 2004. The Agreement came into force on January 1, 2006 and its implementation will begin on July 1, 2006.

This, however, does not mean that Safta has put an end to any trade-related problems in South Asia in general and between India and Pakistan in particular. Though it’s heartening to see that the two countries are moving closer to each other, the pace at which these developments are taking place is extremely slow, sometimes not without reason. For instance, there are apprehensions in Pakistan that under free trade its economy will be swamped by a much larger Indian economy.

Though China too has a surplus in its trade balance with Pakistan, but somehow that is not seen as a problems. In the case of bilateral trade with India, Pakistan’s response has been to stick to a positive list, which allows it to decide the opening of trade on item to item basis. This goes against the spirit of free trade agreements, where trade is generally allowed in all commodities other than those contained in a negative list of sensitive ones. Since others in Safta are following a negative-list approach, the success of the agreement will depend on Pakistan also coming on board.

Also, despite the fact that both India and Pakistan are the members of the World Trade Organization (WTO), only former has accorded the most favoured nation (MFN) status to the latter which has linked reciprocity to the Kashmir dispute between the two countries.

It will be futile, though, to expect Pakistan’s political apprehensions or its fears of being swamped by a much larger Indian economy to disappear overnight. What we can hope for is that once Pakistan realises the benefits of increasing trade, its suspicions will recede.

A series of (successful) deals, may be molasses-for-tea deal or a sugar deal, should remove Pakistani fears of free trade. Furthermore, its willingness to expand the positive list to 1013 from existing 773 items is also a pointer to the right direction. A small one, perhaps, but a significant one nonetheless.

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