India and Pakistan agree to expand trade, rewrite the rules

April 29, 2011

India and Pakistan have agreed to try to improve trade ties during the first meeting of their commerce secretaries since the November 2008 attack on Mumbai.  The official statement released after the talks in Islamabad suggests the agreement is so far largely aspirational, with working committees set up to look at everything from tariff barriers, to India selling electricity to Pakistan, to visas for businessmen.

But the aspiration in itself represents a dramatic shift in relations between India and Pakistan, who have embarked on what may turn out to be their most organised, if slow, attempt at peace-making in their history.  Pakistan has in the past been wary of a a gradual approach to peace-making, fearing India would try to normalise ties while maintaining the status quo on Kashmir.  The Indian government has said that it is ready to discuss all issues, including Kashmir.

Reflecting that aspirational shift, India’s Business Standard called the trade talks “a game-changer”.  Mint newspaper noted that trade between India and Pakistan now amounts to only $2 billion, compared to India’s global trade of about $600 billion.  It quoted Biswajit Dhar, head of Delhi-based think tank Research and Information System for Developing Countries, as saying that, “if  trade relations improve, there will be movement on the political level because a constituency for peace will be created for better ties.”

It also quoted former Indian foreign secretary Kanwal Sibal as dismissing the proposals as “timid and tentative”. “Setting up a joint working group means postponing decisions that they could have taken soon. This is to maintain the appearance of movement that fits into the objectives of both countries,” he said. “Pakistan will never allow itself to become energy dependent on India till there is tangible progress in bilateral relations.”

Yet something quite important is happening here. The commitment to foster better trade tries coincided with a promise of progress on a pipeline which is meant to bring gas from Turkmenistan through Afghanistan and Pakistan to India.  The TAPI pipeline was one of the issues raised by Pakistan Prime Minister Yusuf Raza Gilani at a meeting in March with Afghan President Hamid Karzai.  Pakistan meanwhile is talking about trying to build economic cooperation with Afghanistan through greater regional trade and economic integration which would have big implications for both China and India.

Pakistan’s talks with Afghanistan have raised alarm bells in Washington after the Wall Street Journal suggested Pakistan was trying to convince Afghanistan to give up on the United States in favour of China  The report was presented as evidence of an ever deteriorating strategic relationship between Pakistan and the United States. That however, may be missing the point. Within the region, strategy is an old story. The new one is economic development.

As I noted in my last post, democratically elected governments tend to care a lot about the economy, since that is what helps get them re-elected. The Pakistan government is not far off becoming the longest serving civilian government the country has ever seen.  Its accidental president, Asif Ali Zardari, has been arguing for several years that Pakistan’s economic salvation lies in improving trade with India. 

And the Pakistan Army, which dominates foreign and security policy, has huge stakes in the economy – a legacy of being the most powerful institution in the country.  Its army chief, General Ashfaq Pervez Kayani, according to some analysts, also sees the strategic depth which Pakistan once sought in Afghanistan as lying in a strong economy.

India, meanwhile, has been in no doubt for years that it should focus on economic growth.  For better or for worse, it just displayed its political independence by deciding to short-list two European combat aircraft for a contract worth $11 billion, while rejecting American bids.

In many ways, South Asia is moving on. It is trying to build its economic inter-dependency a way that the United States once encouraged. As the history of Europe showed, only when France and Germany began weaving their economies together after World War Two did they put behind them years of conflict. And the governments of South Asia are no longer waiting to solve their political disputes before they try to forge better economic cooperation and trade.

The United States, meanwhile, is trapped in a post 9/11 war in Afghanistan, trying to fight an old battle with al Qaeda, while other countries supposedly under its tutelage are setting their own course.

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