India and Pakistan
Trade Offers a Sure Path to Peace
by Stanley A. Weiss

NEW DELHI - The historic talks this week between Indian and Pakistani officials in Islamabad, the first since the nuclear rivals nearly went to war in 2002, open the door to the ultimate confidence-building measure - making money, not war.

To the credit of both sides, their new "composite dialogue" will not only address the disputed Kashmir province, but "all bilateral issues," including "economic development." Commerce between rivals does not guarantee peace, but good economics can promote good politics.

The European Union proves the link between prosperity and security. Indeed, the decision last month by the seven-nation South Asian Association for Regional Cooperation to seek a South Asia free trade area by 2006 prompted Prime Minister Atal Bihari Vajpayee of India to predict an EU-style common market and single currency for the region.

Pragmatic entrepreneurs help remind governments that being dead is bad for business. Surging trade between India and China has helped New Delhi and Beijing make progress toward resolving their decades-old border disputes. Beijing's rhetorical outbursts aside, China is unlikely to invade Taiwan, one of its biggest trading partners and largest investors.

The subcontinent has no such economic brake on military escalation. Official bilateral trade between India and Pakistan is a trickle - a mere $200 million, less than one percent of their global trade.

This virtual "no trade area" is unnatural. By the late 1940s, nearly 60 percent of Pakistani exports went to India and a third of Pakistani imports came from India. But Partition cut off Indian factories and mills from their supplies of raw materials in Pakistan. Punjab, the breadbasket of South Asia, was divided and devastated.

New Delhi and Islamabad finally seem to recognize that reversing this economic partition is in their own self-interest.
Krishna Rasgotra, a former Indian foreign secretary, told me that "greater economic ties will, in due course, help facilitate calm deliberation of more complex political and security related issues." Rajesh Shah, a prominent business executive, agreed. "It is in India's interest," he said, "to encourage democratization of Pakistan and to create strong trade and economic links."
Prime Minister Zafarullah Khan Jamali of Pakistan, addressing the U.S. Chamber of Commerce last autumn, said, "people-to-people contact and mutual business interests create a more enduring relationship between nations than is possible through governments alone."

The talks this week in Islamabad set the stage for genuine trade diplomacy. First, as South Asia's strongest economy, India should take the lead and continue reducing tariffs, among the highest in the world, especially those on goods from developing countries like Pakistan.

Second, Pakistan should reciprocate by granting India "most-favored nation" trading status - which India has already bestowed on Pakistan - as required by the World Trade Organization and as implied in the regional free trade agreement signed last month. This would include opening the Pakistani market beyond the list of 610 Indian products now permitted.
Analysts here predict that annual free trade between India and Pakistan could reach $6 billion within a year. Illegal trade via Dubai, Hong Kong and Singapore is already estimated at $2 billion. By avoiding expensive smuggling routes, lower transit costs would mean lower prices for consumers and higher revenues for both governments.

Islamabad need not fear being swallowed by the economic giant next door. On the contrary, under its free trade agreement with New Delhi, Sri Lanka has increased its exports to India by 137 percent. Under a free trade pact, Pakistan's textile sector, the backbone of its economy, would gain access to India's 300 million-strong middle class.

Third, India should drop its reservations over the so-called "peace pipeline" to Iran through Pakistan. India, one of the world's largest gas importers, needs Iran, home to the world's second largest natural gas reserves. New Delhi's fears of dependence on a trans-Pakistan pipeline are understandable. But the estimated $700 million in annual transit fees would give Islamabad an enormous stake in regional stability and prosperity.

Finally, India and Pakistan should rebuild the nuts and bolts of their trade infrastructure. The resumption last month of bus, air and rail links was a start. Lifting burdensome visa restrictions would enable business leaders to travel and trade more freely. As both India and Pakistan's largest trading partner, the United States can help by encouraging exchanges between industry chiefs and economists.

For decades, vested interests - including the millionaire generals who control much of the Pakistani economy - have acted as a constituency for conflict, holding trade hostage with the excuse that Kashmir comes first. But as one Pakistani commentator observed recently, "Kashmir is not a core issue but a corps commanders' issue."

Instead of Indian and Pakistani soldiers exchanging gunfire on the battlefield, imagine Indian and Pakistani entrepreneurs exchanging business cards in boardrooms.