Islamabad, Nov. 10 (NNN) : A new World Bank study says trade liberalisation between Pakistan and India would increase economic and social welfare.
Two countries would seen begin the next round of composite dialogue to resolve bilateral disputes, in addition to meeting of Saarc Commerce Ministers later this month to review progress under Safta, it said.
`The Trade Policies in South Asia: An Overview’ describes key aspects of the current trade regimes in the five largest South Asian countries and concludes that, despite progress towards liberalisation, protectionist forces are still strong in the region hampering growth and poverty reduction.
Trade policies of the South Asian countries are now much more open than they were in the past. Most non-tariff barriers to imports have been removed and tariffs substantially reduced. Even though comprehensive trade liberalisation reforms have been implemented in all of the countries, protection and protectionist forces are still strong and a difficult and challenging trade policy reform agenda lies ahead, the Bank observed.
Following a number of years of negotiation and delays, improved relations between India and Pakistan led to the signing of Safta in January 2004. It is planned that Safta’s trade provisions will come into force in January 2006 and that they will be fully implemented by December 2016. In the meantime the Sapta and various other Regional Trade Agreements (RTAs) are to continue alongside whatever is done under Safta.
The Bank says a study found that the economic benefits to Pakistan of removing impediments to trade with India would outweigh the costs. Two principal groups, consumers (lower prices) and the government (greater customs duty revenue from legalising illicit border trade), would benefit from such liberalisation. Important segments of producers would also benefit because of increased competitiveness and market access to the much larger Indian economy. Inefficient producers would need to restructure and increase competitiveness to stay in the market.
"Because many tariffs in the region are very high, especially in India and Bangladesh, there are large potential trade diversion costs for the region as a whole if the various preferential trade agreements including Safta were to be implemented in a comprehensive way."
The consequent reductions in economic welfare would show up principally in reduced customs revenue and terms-of-trade losses. It is unlikely that benefits through increased competition, economies of scale, or improved operating efficiency of import competing firms would outweigh these overall economic costs, the Bank says. There are much larger gains from increased trade with the rest of the world (ROW), especially trade with the developed countries and with more advanced developing countries in South East and East Asia, including China.
“This is because the South Asian countries have comparative advantage in relation to ROW in similar, mostly Labour intensive products, and the volume of trade and the economic benefits from trading these products among themselves are limited by comparison. "For all these reasons the South Asian countries as a group would do much better economically if each of them were to give first priority to increasing their trading integration with the rest of the world, rather than to the pursuit of regional preferential arrangements."
“The way to do this would be to reduce their tariffs and other forms of protection generally on an MFN basis, thus increasing the shares of both imports and exports in their economies, including imports and exports from their neighbours." This would also reduce the likelihood of economic losses and improve their individual prospects o f benefiting from regional agreements to which they are committed, in particular Safta.
However, the Bank maintains that the regional trade would unambiguously improve regional economic welfare. Selling these stocks to Pakistan could reduce prices and benefit Pakistani consumers, while at the same time increasing economic welfare in India by reducing the subsidies involved in exporting surplus wheat to other countries and reducing the costs of holding wheat stocks, including the cost of the substantial quantities of wheat that are lost in substandard storage.