Trade falls victim to Mumbai attack

By Syed Fazl-e-Haider

Increased tension following the terrorist attack in Mumbai last month, which killed nearly 200 people in India's financial capital, has set back attempts to improve near moribund trade between close-to-bankrupt Pakistan and India.

Proposed secretary-level talks on enhancing trade ties between the two countries scheduled for this month in Islamabad have been postponed for an indefinite period, even as Pakistan denies direct involvement in the attack on civilians by gunmen. Ministerial-level talks that had been scheduled to be held in New Delhi on December 2had already been postponed.

Heightened hostility between the two neighbors in the wake of the Mumbai attacks comes after four years of improved bilateral trade, albeit from an almost non-existent base. The scope for further growth is glaringly obvious. For example, India, the world's biggest tea producer, wants to triple tea exports to Pakistan, the world's third-biggest buyer. In the other direction, Pakistan aims to capture more of the cement market in India's still expanding economy.

India, which exports about a quarter of its annual 800-million kilogram tea output, "Planned to boost sales to Pakistan to more than 20 million kilograms in the next three years ... from 5.47 million kilograms in 2007," Basudeb Banerjee, chairman of the state-run Tea Board of India, said after the attack, according to Bloomberg. The target may not be met after India blamed "elements" within Pakistan for the assaults, he said.

India is seeking to diversify from traditional markets, including Russia, where demand for tea and other commodities has declined because of the credit crisis.

India is the most feasible cement market for Pakistan, where companies have already completed adding capacity to reap possible benefits from India's rising demand for the commodity. Islamabad is committed to export about 100,000 tons of cement per month to India.

Pakistan offers India the most competitive transportation charges compared with other overseas sources in the region and Delhi has shown a willingness to take in the maximum that it can from Pakistan through sea and land routes by abolishing countervailing duties and additional customs duties on cement imports.

Before the Mumbai attack, the two countries had undertaken negotiations to remove bilateral trade barriers, which have increased the cost of doing business and led to trade being routed through Singapore, Hong Kong and elsewhere. Direct trade between India and Pakistan is not more than US$250 million a year of a total bilateral trade worth $2 billion.

The two countries were looking to raise bilateral trade to $10 billion a year after trade talks resumed between the two neighbors in 2003. The bilateral trade balance is strongly in favor of India, which exports 75% of the total and imports only 25%.

The outlook for improved cross-border links will severely diminish if Pakistan reacts to challenges that is was involved in the Mumbai attacks by diverting troops from the Afghan border to its border with India, a prospect Pakistani President Asif Ali Zardari has sought to diminish,

"Non-state actors wanted to force upon the governments their own agenda but they must not be allowed to succeed," Zardari reportedly told Indian Prime Minister Manmohan Singh by telephone.

A New York Times analysis last month argued that Zardari's background would act in favor of improved ties, not least because his financially beleaguered country has had to turn in the past month to the International Monetary Fund to help it pay off international creditors.

"A businessman at heart, Mr Zardari understands the benefit of strong trade between India and Pakistan. Now on life support from the IMF, Pakistan would profit immensely from the normalization of relations," the New York Times said.

The most immediate barrier to trade has been inadequate cross-border transport facilities. The two sides, still deeply suspicious of each other after a number of wars and armed clashes since they became independent of British rule in 1947, have agreed to allow trucks to move within about one kilometer of each other's border and to build truck terminal facilities. Pakistan has developed one such terminal at Wagha, on the Grand Trunk Road between Amritsar in India and Lahore in Pakistan, with space for about 100 vehicles. India has yet to construct a comparable facility on its side of the border at Attari.

Progress is more apparent in sea-going trade, after Islamabad and New Delhi in late 2006 signed a shipping protocol allowing flagships of both the countries to carry third-country cargo from each other's ports, restoring direct shipping links between the two countries after 35 years. Pakistan also added 202 more items on its list of imports allowed from India.

Reflecting the lost opportunities caused by continued hostility, Malik Sohail Hussain, vice president of Pakistan's National Traders Alliance, said trade and commerce should not be made victims of politics, and confrontational postures would hurt both Pakistan and India, according to the country's Business Recorder newspaper. "Bilateral trade is less than $1.5 billion while it should have been $10 billion," Hussain quoted as saying. "The standard of living of the people of the sub-continent cannot be enhanced without bilateral trade and we cannot live in tension or by ignoring each other."

While Pakistan is having to defend itself against claims that is helping to perpetrate terrorism outside its borders, it has suffered numerous attacks at home, particularly since the coalition government that took power early this year stepped up the fight against extremists in tribal areas near the Afghanistan border. Among them, at least 60 people died in a suicide attack on the Marriott hotel in Islamabad in September. In the first week of December, a bomb blast in Peshawar in North-West Frontier Province killed at least 22 people and wounded 80.

"While the terrorists may try to derail the peace process between Pakistan and India, we should not allow them to succeed in their nefarious designs," said Pakistan's Prime Minister Yousuf Raza Gilani. Speaking at a dinner hosted for European Union heads of mission last week, he said Pakistan was ready to engage India closely to expose the hidden hand behind the Mumbai terror attacks.

Relaxed tensions in the sub-continent would certainly be to the benefit of the US.

"A rapprochement with India would permit the Pakistani government to devote more military resources to the fight against terrorists," The Washington Post said in a November 29 editorial. "The United States, in what's left of the [George W] Bush administration's term and right from the start of [president-elect Barack] Obama's administration, must continue nudging these two rivals toward cooperation. As the bloodbath in Mumbai so vividly illustrates, terrorism is not only America's enemy, but Pakistan's and India's as well."

The United States could play a role in improving trade between Pakistan and India by offering duty-free imports if one of the sub-continental countries used the other's inputs in their exportable items to the US, according to study by CUTS International, an India-based research and networking group. The study cited a scheme instituted in 1996 that allows duty-free exports to the US market from Jordan and Egypt given a minimum level of inputs from Israel in the manufacturing of these products.

Even so, while trade can help in normalizing relations between the two archrivals, expecting more peaceful relations between the two economies through trade is a dream, the report said.