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december 3, 2011 vol xlvi no 49 EPW Economic & Political Weekly14

Most Favoured Nation: New Trade Opportunities for India and Pakistan

Nisha Taneja, Pallavi Kalita

The sixth round of trade talks between India and Pakistan is noteworthy for having followed up on all the decisions taken in the fifth round of April 2011. Pakistan has decided to grant the Most Favoured Nation status to India, and the latter has initiated business-to-business and government-to-business interaction for addressing information gaps. These measures could help realise a bilateral trade potential of $25.2 billion, estimated as of 2010, an amount 10 times larger than the current $2.5 billion trade.

Pakistan’s decision to grant the Most F avoured Nation (MFN) status to India on 2 November 2011 is a signi-

ficant move in the bilateral trade relations between the two countries. Under the MFN clause, all members of the World Trade Organisation (WTO) are obliged to extend trading benefits to a country equal to those accorded to any other country. While India accorded Pakistan the MFN status in 1996, Pakistan’s decision to reciprocate has come 15 years later.

Under the existing bilateral trade arrange-ment between the two countries, Pakistan permits the import of only a limited number of items from India, often referred to as the “positive list” approach. This approach is applied exclusively to India, a violation of the MFN principle. Items not included in the list are banned from entering Pakistan. During the last decade, Pakistan has in-creased the positive list gradually. In 2000, it permitted only 600 items for import from India. The number of items was increased to 767 in 2004 and further to 1,075 items in 2006. By 2009, it was increased further to 1,934 items.

Trading under the positive list approach has led to large informal trade flows, mostly in items excluded from the positive list. A large proportion of such trade is routed through Dubai from where goods enter into the Pakistani market after passing through Iran and Afghanistan or directly

through Karachi by sea. The positive list approach also lacks transparency, creates uncertainties for traders and leads to high transaction costs (Taneja et al 2011).

Following soon were the sixth round of talks on commercial and economic coop-eration held on 14-16 November 2011, lay-ing down the sequencing and timeline on the move towards full normalisation of trade relations. In the first stage, Pakistan will make a transition from the current positive list approach to a “small” negative list. The timeline laid down for the finali-sation and ratification of the negative list is February 2012. In the second stage, the negative list will be phased out by the end of 2012. The new trading regime will also be applicable to all trade through the land route after the new infrastructure at Attari-Wagah is complete. The timeline for the commissioning of the new infrastructure at Attari-Wagah has been laid down to co-incide with the announcement of the neg-ative list. This is a marked change from the current practice whereby only 14 prod-ucts are allowed to be traded by the road route. Clearly if these timelines are fol-lowed, there will be no contentious issues left on the MFN status.

What is noteworthy about the sixth round of talks between the commerce secretar-ies of the two countries is that they have followed up on all the decisions taken in the fifth round of talks held in April 2011 (Ministry of Commerce 2011c). The agenda laid down in the latter included according MFN status to India by October 2011 and addressing non-tariff barriers by setting up joint working groups and sub-groups within specified timelines (Ministry of Commerce 2011a). Pakistan has been very concerned about non-tariff barriers in accessing the Indian market. In a joint working group co-chaired by the two

Nisha Taneja (ntaneja@icrier.res.in) and Pallavi Kalita (pkalita@icrier.res.in) are at the Indian Council for Research on International Economic Relations, New Delhi.

dependent on the commitment and con-viction of environmental activists and members of the Dahanu Authority. Even as competing lobbies continue to push for the removal of the Dahanu Authority and de-notification, the environmentalists walk on a tight rope attempting to protect the natural resource base of the region. Efforts to create a parallel economy based on rural tourism are options that need to be

urgently explored. The need of the hour is to demonstrate alternative and sustain-able forms of development that are eco-nomically and ecologically viable.

Notes

1 See Government of India, Ministry of Environ-ment and Forests, Notification dated 20 June 1991, New Delhi. Dahanu was only one among three areas in the country declared ecologically fragile at that time, the other two being Dehradun

and Murud Janjira. Currently there are 10 such designated zones.

2 For more details, see Government of India, Ministry of Environment and Forests, Notification dated 19 February 1991.

3 See Bittu Sehgal vs Union of India, W P (Civil) No 231 of 1994.

4 For more details, see Government of India, Minis-try of Environment and Forests, Notification dat-ed 19 December 1996, New Delhi.

5 Interview with Debi Goenka (Environmental Activist, Mumbai), by Geetanjoy Sahu.

6 Interview with adivasi community of Sogve, Raytali and Jamshet villages, by Michelle Chawla.

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commerce secretaries, in August 2011, the Pakistani side specified the non-tariff barriers perceived by its business commu-nity in sectors such as cement, processed food, textiles, surgical instruments, fruits and vegetables and leather (Ministry of Commerce 2011b). The identified barriers were related to complex and lengthy pro-cedures in India and the lack of awareness on the part of Pakistani business and government authorities of Indian regula-tions and licensing requirements for a range of products.

Subsequently, in September 2011, the Indian government arranged an interactive session between Pakistani businesspersons and Indian regulators where the latter clarified that the standards were non- discriminatory. Further clarifications were sought by the Pakistani side at the sixth round of talks. Indian regulators provided information to the Pakistan delegation on the regulatory regime in India. It was also decided that the Indian side would send its regulators to Pakistan in March 2012 for an interaction with Pakistani business-persons. Again, these measures are being taken in a very short time span within predetermined timelines. The business-to-business and government-to-business inter-action is an innovative, yet simple method of addressing information gaps on the business environment between the two countries. This not only serves as a power-ful means to confidence building but is an effective trade-facilitation measure.

Pakistan had also raised issues related to customs clearance, valuation and accept-ance of test certificates linked to standards. To address these concerns, a Customs Liaison Border Committee was set up to ensure expeditious clearance of goods and har-monisation of customs procedures. Nodal customs officers have been identified on both sides with whom traders can estab-lish direct contact on all matters pertain-ing to delays in trade consignments, trade document requirements and other customs-related matters.

Trade Possibilities

The trade-enhancing measures being adopted by the two countries will no doubt open up new trade opportunities for the two countries. Bilateral trade between India and Pakistan stood at $2.5 billion in 2010

of which India’s exports to Pakistan were $2.2 billion and imports from Pakistan were $0.3 billion. The trade balance con-tinues to be in India’s favour, with a $1.9 billion surplus for the country in 2010.

The top five commodities exported from India to Pakistan in 2010 included chemical products such as paraxylene, raw and refined sugar, cotton and woven fabrics, accounting for 56%. Sugar alone accounted for 24% of exports. Dates were the most

important item being imported from Pakistan, accounting for 18% of total imports and cement accounted for almost 11.2% of imports from Pakistan. The top five imports from Pakistan into India in-cluded dates, cement, p etroleum oil and chemical products, a ccounting for 49%.

The restrictive trade regime and the presence of large informal trade flows indicate that there is a huge untapped trade potential between India and Paki-stan. There are several items that the two countries can import from each other in-stead of importing from the world. In order to assess the magnitude of trade possibili-ties (referred to as the trade potential) bet-ween the two countries, a simple Potential

Trade Approach (PTA) is used. Products having trade potential are identified as those that have (1) adequate demand in the receiving country, (2) adequate supply capabilities in the source country.

Potential trade for any commodity is given by the minimum of SE and MI less ET, where SE, MI and ET are the supplier’s global exports, receiver’s global imports and existing trade between the supplier and the receiver. The exercise was conducted

first by using Pakistan as a supplier and then using India as the supplier. Data from the United Nations Commodity Trade Statis-tics Database (UNComtrade) was employed. The trade data used is at the six-digit level of classification under the harmonised system of classification (HS code). The results of the exercise show an estimated bilateral trade potential of $25.2 billion in 2010, 10 times larger than the current $2.5 billion trade.

India has an untapped export potential of $21.1 billion, of which $7.2 billion is accounted for by petroleum products alone. Exports of petroleum products by India to Pakistan can increase manifold after Pakistan grants MFN status to India.

Table 1: India’s Export Potential to Pakistan 2010 ($ million)

Product ProductDescription India’sExports Pakistan’sImports India’sExports TradePotentialCode totheWorld fromtheWorld toPakistan

271019 Petroleum oils and oils obtained from bituminous minerals, other than crude 21,029.6 6,551.9 1.0 6,551.0

271011 Light petroleum oils and preparations 15,071.7 686.4 25.5 660.9

520100 Cotton, not carded/combed 2,973.0 760.2 300.3 459.8

851712 Telephones for cellular networks 1,481.9 425.4 0.0 425.4

390210 Polypropylene, in primary forms 800.0 329.1 20.6 308.5

870322 Motor vehicles 2,151.8 285.8 0.0 285.8

090240 Tea, black (fermented) 570.7 298.5 22.5 276.0

290243 Paraxylene 426.4 353.6 123.6 230.0

890520 Floating/submersible drilling platforms for light vessels, dredgers, etc 1,072.9 200.4 0.0 200.4

721049 Flat-rolled products of iron/non-alloy 662.5 199.5 0.3 199.2Source: UNComtrade.

Table 2: Pakistan’s Export Potential to India 2010 ($ million)

Product ProductDescription PakistanExports India’sImports PakistanExports TradeCode totheWorld fromtheWorld toIndia Potential

271019 Petroleum oils and oils obtained from bituminous minerals, other than crude 1,194.8 2,949.1 2.9 1,191.8

901890 Instruments and appliances used in medical, surgical, dental or veterinary sciences 219 334.1 0.3 218.7

711319 Articles of jewellery and parts 576.9 178.1 0.2 177.9

520100 Cotton, not carded/combed 216.7 84.1 0.1 84

730690 Tubes, pipes and hollow profiles 69.2 76.5 0.1 69.1

220720 Ethyl alcohol and other spirits 86.7 66.6 0.1 66.6

850239 Electric generating sets 66.3 56.8 0.1 56.7

80410 Dates, fresh/dried 52.4 95 0.1 52.3

730890 Structures and parts of towers, tubes, plates, rods, etc 46.2 149.3 0.1 46.1

252329 Portland cement 373.8 42.5 0 42.4Source: UNComtrade.

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Compared to Bangladesh, Sri Lanka and Nepal, I ndia’s exports to Pakistan in this sector are quite low. In 2010, India’s petro-leum oil and products exports to Nepal were the highest at $627.8 million, fol-lowed by Sri Lanka at $598 million and Bangladesh at $110.1 million.

For the top 10 products, India’s export potential to Pakistan accounts for 45.5% of total exports. Cotton and organic chem-icals like paraxylene, which are already major export commodities to Pakistan, are shown to have additional potential for exports of $459.8 million and $230 mil-lion, respectively. Other top 10 products with notable export potential include light petroleum oils and preparations, motor vehicles, telephones, tea (fermented), etc (Table 1, p 15).

Pakistan’s export potential to India in 2010 was $4.1 billion, of which $1 billion was in petroleum products. For the top 10 pro-ducts, Pakistan’s export potential to India is $2 billion, which accounts for 49% of the total export potential (Table 2, p 15). Dates have an additional export potential of $52.3 billion. The top 10 pro ducts with export potential include petroleum oils, cotton, jewellery, electric generating sets, etc.

It is to be noted that India and Pakistan both have export potential in petroleum oils (HS code 271019). However, at the more disaggregated level of the HS code eight-digit level, Pakistan’s major petro-leum oil export is base oil (HS code 27101960), while India’s comparative ad-vantage within petroleum oil lies in high speed diesel (HS code 27101930), aviation turbine fuel (HS code 27101920), fuel oil (HS code 27101950) and lubricating oil (HS code 27101980).

The PTA approach is expected to yield more realistic results compared to econo-metric models that use bilateral trade data. Since existing bilateral trade is limited due to the positive list approach, any econometric model would not yield correct results. The PTA, however, also has its limitations. First, all computations are based on only one year’s data, i e, 2010. The advantage of using data for one year is that it allows us to focus on the most recent data, but this approach ex-cludes items traded in previous but not in the most recent year. A second limitation of this approach is that it is conducted at

the HS six-digit level and not at the eight-digit level, since the available inter-national databases do not carry trade statistics at the eight-digit level. The PTA does not take into account differences in prices of commodities being supplied by the partner country and by suppliers from the rest of the world. However, if we as-sume transport and other transactions cost to be very low, given the geographi-cal proximity bet ween the two countries, then this approach would be more indica-tive of trade possibilities between them. Given the limitations of the PTA, the re-sults should be treated as merely indica-tive of trade possibilities, offering ball-park figures on possible trade between the two countries.

The Broader Agenda

A more detailed examination of the fifth and sixth rounds of talks shows that the two governments have not only addressed the two major concerns of the MFN status and non-tariff barriers, but have also taken new trade initiatives to facilitate electricity trading between the two countries, petro-leum trading, Bt cotton seed trade, and trade in information technology sector (Ministry of Commerce 2011c). A liberal investment regime for Pakistani invest-ments in India, collaboration in trade

p romotion activities, and opening of bank branches on both sides are other initiatives that are on the agenda for the trade talks.

What is most remarkable about the recent developments is that between April 2011 and November 2011, tremendous ground has been covered in addressing pending issues. The adherence to timelines set for every aspect on the agenda is unprece-dented in trade negotiations that the two countries have had with other countries. The most tangible decision was regarding MFN status as it required approval from the Pakistani cabinet. This timely decision has restored confidence between the two countries. There is no doubt now that the blueprint laid out for implementation of the MFN will be carried out as per the timeline. Measures related to removal of non-tariff barriers have set the process of addressing all information asym-metries related to trade between the two countries in motion.

One major pending issue relates to visa restrictions. Granting of city-specific visas, requirements on police reporting on arrival and before departure, required exit from the port of entry, and delays in granting visas are some of the restrictions that limit market access for aspiring traders. In October 2011, the two sides finalised the

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Economic & Political Weekly EPW december 3, 2011 vol xlvi no 49 17

Electronic Waste Recycling for Developing Economies

Sanchari Ghosh

This article reviews the progress of electronic waste recycling around the world and emphasises the need to give more economic importance to this sector in the developing nations. Two cases are considered for determining a model of recycling under the present constraints. These alternative models can provide a basic foundation for laying out the respective roles of producers and consumers for economic recycling of this waste.

Following the Basel Convention in 1992, measures on the proper dis-posal and/or recycling of solid

waste, particularly those hazardous to the environment, have been one of the priori-tised areas of environmental economic a ctivity for the developed nations. A r ecent development (starting around the early 2000s) has been the search for appropriate strategies for disposal of electronic waste (e-waste), and to put forth plans for imple-menting economic and environment-friendly recycling of this waste. The im-portance of the latter has been identified and positive measures undertaken from the perspective of demand and supply in many developed countries as well as in emerging economies like India and China. However, the problem persists in the developing nations: proper disposal of e-waste is still not in practice, let alone ac-cepting an economic and scientific method of recycling it.

The backbone of electronic waste recy-cling is the Extended Producer Respon-sibility (EPR) scheme first introduced in Switzerland in 2003. It places the burden of recycling on the producers and hence delineates a recycling market as part of the intermediate goods market of the economy. Most European countries and some south-east Asian nations have fol-lowed this model while in California, where recycling has taken on an important

role, the consumers have to pay a sur-charge. In whatever form the recycling sector is organised, many developed n ations have demarcated a sector which functions smoothly if the relevant agents, i e, the consumers and the producers play their respective roles. For instance, in Cali fornia, a recycling fee is collected from consumers to fund a programme that in turn redistributes recovery and recycling payments to “qualified entities” to cover the costs of collecting and recy-cling electronic waste (Wolfington and Maranto 2008). In Maine and in Minne-sota, it is the “producers pay” (PP) princi-ple in practice. In Maine which was the first US state to introduce the PP princi-ple, Wagner (2009) found that the three year e-waste recycling programme has resulted in a significant decline in dis-posal and an increase in environmentally sound recycling.

Pollution Havens

The same is not true for the developing nations. The problem here is deeply root-ed in the nexus between the trade envi-ronment and the economy of these na-tions. Like many negative pollution exter-nalities e-waste has been shipped to the developing nations conforming to the pol-lution haven hypothesis. Less stringent environmental regulations, a lethargic public attitude and relatively poor techni-cal infrastructure have together contrib-uted to the emergence of an informal “market” in the backyard of stores and factories where labourers work under unhygienic and adverse environmental conditions. The main objective of this re-search is to assess the economic impor-tance of this sector as it exists in the

Sanchari Ghosh (sanchari.ghosh@okstate.edu) is with the Spears School of Business, Oklahoma State University, Stillwater.

draft text of the agreement for streamlining visa procedures (Ministry of External Af-fairs 2011). However, the contours of the agreement are not known yet. While the two countries work at easing the visa re-strictions, there is no doubt that a more liberal visa regime could provide an ef-fective channel for information exchange on trade-related matters between the two countries. At this point it is impossible to have a pessimistic view on Indo-Pakistan trade relations.

References

Ministry of Commerce (2011a): “Joint Statement of the 5th Round of Talks on Commercial and Economic Co-operation between Commerce Secretaries of India and Pakistan”, Islamabad, 27-28 April. Last accessed on 12 November 2011: http://commerce.nic.in/whatsnew/JOINT%20STATEMENT_5th_TALKS_COMMERCIA_ECONOMIC_%20COOP-ERATION_INDIA_PAKISTAN.pdf

– (2011b): “Minutes of India-Pakistan Meeting of Joint Working Group on Economic and Com-mercial Cooperation and Trade Promotion”, New Delhi, 23-24 August. Last accessed on 14 Novem-ber 2011: http://commerce.nic.in/WhatsNew/Minutes_Inida_Pak_JWG_23_24_Aug_2011_New_ Delhi.pdf

– (2011c): “Joint Statement of the 6th Round of Talks on Commercial and Economic Co-opera-tion between Commerce Secretaries of India and Pakistan”, Press Information Bureau, New Delhi, 14-16 November. Last accessed on 17 No-vember 2011: http://commerce.nic.in/writere-addata/pressrelease/Joint_Statement_India_Pak_Round6th.pdf

Ministry of External Affairs (2011): “Joint Press State-ment of India – Pakistan Joint Working Group on Visa Matters”, New Delhi, 14 October. Last ac-cessed on 10 November 2011: http://mea.gov.in/mystart.php?id=530118398

Taneja, Nisha, Shravani Prakash and Pallavi Kalita (2011): “Issues in India-Pakistan Trade Negotiations”, Economic & Political Weekly, 46(30).