Context

Recently, Pakistan’s Foreign Minister said his country may “seriously examine” the question of resuming trade with India.

Reasons for Halting of India Pakistan Bilateral Trade

• Abrogation of Article 370: Bilateral trade between India and Pakistan has been suspended since 2019.
• Increase in customs duty: In 2019, India placed a 200% tax on Pakistani imports.Pakistan, as part of its unilateral measures, halted bilateral trade with India.
• Abolition of Most Favored Nation clause: In 1996, India granted Pakistan most favoured nation status (MFN). Following the Pulwama terrorist attack, Pakistan’s MFN status was abolished.

Composition of Trade Before Suspension

• Trade Surplus for India: India had a trade surplus because the total value of products and services shipped to Pakistan was significantly higher.
• Little Share in India’s Trade: India-Pakistan commerce accounted for only $2.29 billion (0.35% of India’s total trade).
• Imports from India: Cotton, organic compounds, polymers, tanning/dyeing extracts, nuclear reactors, boilers, machinery, and mechanical appliances are among the products imported from India.
• Imports from Pakistan: Imports from Pakistan include mineral fuels and oils, edible fruits and nuts, salt, sulphur, stone and plastering materials, ores, slag and ash, raw hides, and leather.

Condition Post the Bilateral Trade Suspension

• Indirect trade: A few less freight-sensitive products, such as dry dates, began entering each other’s markets through indirect methods.
• Indian merchandise appeal: Products such as cloth, cosmetics, and jewellery have freely entered Pakistani marketplaces, earning popularity among local consumers.
• Entering of Indian Goods through other  countries: Indian commodities entered Pakistan through Afghanistan, China, and Dubai, filling the gap in cross-border commerce.
  • For Example: Dubai has facilitated trade between the two countries by serving as a neutral ground for the various companies to conduct business without being inhibited by political tensions or border crossings.
• Exorbitant import costs: High import costs pushed Pakistan to abolish the restriction on cotton imports from India, as importing cotton and sugar from nations such as the United States and Brazil is costly and time-consuming.
• Low Volume Trade: Low-volume, high-value items include jewellery, machinery, pharmaceuticals, and chemicals. 
  • Businesses can afford to take a longer route, particularly through Dubai, because the additional costs are transferred directly to customers.

Challenges to Normalization of India Pakistan Trade

• Trade circumvention: Imports to Pakistan are routed through Dubai or Singapore, resulting in additional freight, transhipment, and transportation costs.
• Trade- Ban: Pakistan’s imports fell drastically between April 2020 and January 2021, while cotton imports stopped altogether. 
  • The only increase was in pharmaceutical products, as Pakistan looked to ensure sufficient supplies of medicines during the Covid-19 pandemic.
• Policy Instability: In 2021, Pakistan’s Economic Coordination Council, a top decision-making body, allowed the import of cotton and yarn from India. 
  • A low domestic yield and the high cost of imports from the likes of Brazil and the United States were believed to be the reasons behind the change of stance. 
• Classifying Imports: In 2012, Pakistan replaced a “Positive List” of over 1,950 tariff lines allowed for import from India with a “Negative List” of 1,209 lines that could not be imported.