Trading with Pakistan makes sense

Two separate op-eds have been published by Sushant Singh (editor of Pragati) and Vikram Sood (former head of RAW) in the last month in the same paper, Mid Day, arguing basically the same thing. Namely, trading with Pakistan, a country that indeed still supports Islamist terrorists against India, does not make any – or at any rate a lot of – sense.

I disagree and here is a one-line summary of my disagreement:  Moving towards free trade with Pakistan will not solve border disputes or end religious hatred, but trade does make those two outcomes more likely on the margin without hurting India in any realistic scenario.  

(Note: "on the margin" in both bold and italics. Keep that phrase in mind. Nitin similarly argues that the benefits could be large whereas the proposal only "involves modest risks and is reversible". Dr Mahbubhani also made a similar case, although I think he is more optimistic than I am)

Now, Sushant does concede towards the end of his piece "Yes, bilateral trade is the only long-term structural solution for lasting peace between India and Pakistan". I agree, and this post will not repeat the generic benefits of free-trade although I have some sympathy for the greatest free trade advocate alive (Dr Jagdish Bhagwati) when he writes "it is worth recalling what Pierre-Joseph Proudhon reportedly told the Russian intellectual Alexander Herzen: “And do you imagine that once a thing has been said, it is enough?….It has to be dinned into people, it has to be repeated over and over again.”

But back to the specific case of India-Pak trade. Sushant, after conceding that we must trade in the long-term, insists that we only start down that road after the Pakistani military-jehadi complex has been dismantled. The question naturally arises how exactly will the said complex be destroyed? Destroying it from outside seems infeasible as of now – this is not the Second World War, and Pakistan is not a defeated Japan – in that case the country transformed was attacked with nuclear weapons, here the polity to be ostensibly transformed has nuclear weapons.

Maybe the "destruction" of the Pakistani jihadi-military establishment in mind of these authors is a longer-term, more sophisticated combination of diplomacy and covert operations that I do not grasp – and maybe that will work, but what is still not clear is why not trade till then? It is not that the rest of the world is not trading with Pakistan because of significant sanctions – and India's refusal to trade would constitute some kind of tipping point in international pressure against their army. That scenario is neither true nor realistic in the near future.

Next consider this: the idea of "trade after terrorism solved", is mirrored west of Wagah by people like Hafiz Saeed who say (disingenuously) "trade after Kashmir solved", and this is not a co-incidence. He understands that trade with India could reduce Pakistan to a, horror of horrors, "mandi" (a marketplace). The "unbearable lightness" of being peaceful and prosperous haunts Islamists. The ennui that the end of history implies scares them; they just want to continue the clash of civilizations.

As a liberal Pakistani columnist notes, "The kind of dumping he (Saeed) fears, is already done by China. But he isn’t interested in that. Secondly Pakistan’s food inflation is the highest in South Asia and cheaper food items can be a boon. And thirdly, Pakistanis will also sell products in India and bring back profits." She proceeds to quote Tom. G. Palmer, a Cato Institute academic and liberal economist "Trade is like conversation. The whole point of trading is to get things that others can make more cheaply. It creates an incentive on both sides of the border to find common ground for peace. Nations that trade are less likely to go at war. In fact, the bigger the bulk of trade, fewer the chances of a conflict”

Once again, those opposed to trade do not have to fully agree with Palmer, but they do have to clearly explain how instead it harms India? Then, Sushant and Mr. Sood both mention bilateral trade deficits in their pieces. As the latter writes

…trade imbalances such as ours with China and the content of the trade have inbuilt characteristics of a future conflict.

Unfortunately, a bilateral trade deficit is one of the most misunderstood economic concepts, and the venerated authors seem to have fallen for that misunderstanding. What matters is a country's total (not bilateral) trade/current account deficit, and even that is not as important as it sometimes seems if a country has a floating currency and a decent FDI/FII ratio (But let us for a moment concede that the total deficit does matter a lot for I do not want to get very technical here)

Then, Mr Sood goes on to write

Wars have been fought globally over trade and resources for centuries and continue till today" (emphasis mine)

Let us leave out the "resource" bit, and focus on the "trade" part. Where are wars being fought in the name of trade today? I am sure there could be a couple of recent cases tangentially relevant, but how could India and Pakistan be more likely to fight a war because of trade? Or India-China, China-America, Taiwan-China etc? Mr. Sood seems to be confusing the times of imperialism when countries were forced to export resources and import finished goods with mostly voluntary trade of today's times. This confusion, as a side note, unfortunately also lead a free India's first leaders towards autarky.

And then of course the classic strawman:

The current mantra is that trade between India and Pakistan is the magic key that will transform India-Pakistan relations and lead to eternal peace.

No significant group of serious people believes that. This is, I am sorry to say, just lazy analysis. We are all guilty of it from time to time, but it had to be pointed out here. As I wrote at the beginning, deeper trade engagements are likely to help at the margin. That is, things could well be worse tomorrow, yet they would still be less worse off as compared to no trade at all.

Mr. Sood continues

The only difference today is that Pakistan, is in the middle of an economic slump. It faces an acute power and energy shortage, a low growth rate and rising deficit, high inflation and low investment, would want to temporarily shed the Kashmir-first slogan and get over its economic plight before reverting to form…

Very much possible, indeed likely. So what? They are looking after their interests as they see it. We must look at ours. Yes, the Pakistani military has a strong control over the local economy – and significant trade with India can only weaken that control, not strengthen it and that is in our interests. Trade looks only at price and quality and I would posit that a more open market would find out that the Pakistani generals are not very good at multi-tasking.

Regarding the various modalities, Mr. Sood makes a valid point:

What would happen to the visa regime – security related issues relating to destinations, frequency, ports of entry and exit, mode of travel…

These issues must be handled gradually and carefully. But one must also realize that not all terrorists enter India legally anyway. Yes, their reconnaissance supporters may do, but to prevent that we have already made our visa procedures so draconian for everybody that we are losing out on executives, entrepreneurs, students and volunteers of all nationalities. Port security, visa system has to be continuously upgraded by India anyway, and if required we can do this unilaterally.

India will not be required to resign to terrorism because of trade any more than whatever is already true. At worst, these issues may not get resolved at all as the above authors say – but they certainly will not get any worse. On, the other hand there is absolutely no harm in encouraging a group within Pakistan who do not mind seeing their country as a prosperous, peaceful and secure "mandi". If the aim of the trade-with-Pak skeptics was to douse any potential optimism, I am with them. But if their voices slow down the trade liberalization process itself, I am not. I am afraid they have overstepped from the former to the latter.

One response on “Trading with Pakistan makes sense

  1. Ajay

    Trade is indeed good.

    But will security be compromised by making it that much easier to smuggle in arms. Not that it is difficult now, but regular passage of containers that are largely unchecked thanks to our inept officials may open problems of a different magnitude

    The easy route through Nepal is already being exploited for smuggling.

    Not scaremongering, just a genuine point of view.

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