Published: Business Line, July 05, 2006

By Pradeep S Mehta & N.C. Pahariya

“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.”
ā€” John Maynard Keynes, 1919.

Trade and commerce have been the most effective way of establishing peace between rival nations. History offers many examples to support this. The formation of the European Union (EU), giving rise to higher levels of economic well-being resulting from enhanced economic cooperation, was instrumental in assuaging the enmities and atrocities of the Second World War in the Continent.

Opportunity for Asia
In a similar vein, the formation of the South Asian Free Trade Area (SAFTA) by the seven South Asian nations of India, Pakistan, Bangladesh, Nepal, Bhutan, the Maldives and Sri Lanka could provide an opportunity to forge sustained peaceful political and economic relations in the sub-continent, especially between India and Pakistan, based on mutual respect and cooperation, as has happened in Europe under the EU umbrella.

History provides ample evidence of belligerent neighbours never progressing or prospering. As 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.”

The drive for economic integration often begins with political objectives. Like France and Germany in the 1950s, the newly established democracies of the Southern Cone formed MERCOSUR in the mid-1980s in the hope of cooling the traditional military hostility between major regional powers: Argentina and Brazil. The Southern African Development Community (SADC) was formed in the 1980s as a coalition opposed to apartheid in South Africa; it, more recently, turned to creating a free trade area. Some observers note that African Customs unions and FTAs are as active in conflict resolution as in trade liberalisation.

Easing of tensions between India and Pakistan is seen by many as the real payoff of the SAFTA, regardless of what happens to trade barriers in the region (World Bank’s Global Economic Prospects, 2005).

Role of RTAs
Regional Trade Agreements (RTAs) also can provide institutions and act as a forum for bargaining and negotiations to address tensions before they erupt into conflicts. Many studies also point out that RTAs that expand trade flows appear to have a considerable dampening effect on conflict. According to a study by Mansfield and Pevehouse (2000), the likelihood of the outbreak of a militarised inter-state dispute between two nations declined by around 50 per cent if both belonged to the same RTA. However, only RTAs that expand trade flows 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.

The South Asian Association for Regional Cooperation (SAARC) was formed by Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka in 1985 for increasing political-economic cooperation. Over time, the economic focus of SAARC gradually sharpened leading to the signing of the SAPTA (preferential trade agreement) in 1995. Nonetheless, nothing substantial happened but it resulted ultimately in the signing of SAFTA in 2004. The agreement came into force on January 1, 2006, and its implementation began on July 1.

Indo-Pak experience
Bilateral trade between India and Pakistan has been hostage to political compulsions for too long. Though both countries are moving closer, it is at an extremely slow pace. There are apprehensions in Pakistan that under free trade, the economy will be overwhelmed by a much larger India. Even China has a surplus in its trade balance with Pakistan, but that doesn’t seem to be so bad. In the case of bilateral trade with India, Pakistan’s response has been to stick to a positive list, which decides on specific items. This goes against the spirit of FTAs, where trade is generally allowed in all commodities other than those in a negative list of sensitive ones.

Since the others in the SAFTA are following the negative-list approach, the success of the agreement will depend on Pakistan doing the same. Similarly, despite both countries being WTO members, only India has accorded Pakistan the most favoured nation (MFN) while Islamabad has linked it to the Kashmir issue.

It would be futile, though, to expect Pakistan’s fear of the 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 ā€” maybe a molasses-for-tea deal or a sugar deal ā€” could remove Pakistan’s fears of free trade. Furthermore, its willingness to expand the positive list to 1,013 from existing 773 items is also optimistic. A small one, perhaps, but a beginning nonetheless.

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