Pak-India trade: Economic Opportunties and Policy Challenges

The rapid pace of recent policy developments towards trade liberalization with India has created space for scholarly research to understand its implications for Pakistani businesses and consumers. The decision of Pakistan to grant India MFN status assumes immense significance as it appears to have been received by many in Pakistan with a sense of optimism combined with some trepidation. On the one hand, it has created expectations of substantial economic opportunities for the country, which might also help alleviate the trust deficit between the two countries. On the other hand, it has reignited apprehensions in Pakistan’s business and policy circles as to whether this would further the asymmetries in bilateral trade by adversely affecting the domestic industries currently insulated from competition with the Indian market. The close geographical proximity between the two countries is expected to provide an ideal platform for not just greater trade flows, but also pave the way for a more peaceful relationship between the two countries. In a large number of circumstances, trade policy modelers turn to partial equilibrium modeling in an imperfect substitutes framework. This paper develops a formal representation of this imperfect substitutes model and applies it to trade liberalization within the negative list between Pakistan and India following Pakistan’s decision to grant MFN status to India. It provides estimates for ranges of output and welfare effects for a number of sectors of interest. It sets these results within the history of Pakistan-India trade and the political economy of the negative list.