The recent partial opening of land borders between India and Pakistan signals a thaw in the troubled relations between the two South Asian neighbours. The two sides should capitalise on the moment and try normalising their imperilled trade relations. After the Pulwama terror attack, bilateral trade between the two countries plummeted from around $2 billion in 2017-18 to a paltry $280 million in 2020-21 (April to February). From the Indian standpoint, as a Centre for Policy Research report argues, a continuing freeze in relations with Pakistan will “enhance India’s external vulnerability to other actors, in particular, China”. “Since India-Pakistan relations will remain adversarial for the foreseeable future, its effective management should be the main objective”, which in turn requires, among other things, fostering economic and trade relations. India is not averse to having normal trade relations with Pakistan, as stated by Hardeep Puri, the then minister of state for commerce and industry, in Parliament in March 2021.
However, the normalisation of trade relations would require the following steps. First, Pakistan needs to revoke the unilateral suspension of trade with India undertaken in August 2019 due to India’s decision to dilute Article 370, which granted special status to Jammu and Kashmir. This trade suspension by Pakistan is inconsistent with the General Agreement on Tariffs and Trade (GATT) and the South Asian Free Trade Area (SAFTA) agreement — the two international law instruments that regulate trade between India and Pakistan. GATT, as part of the World Trade Organisation (WTO), allows countries to adopt trade-restraining measures on certain grounds such as public health and conservation of exhaustible natural resources (Article XX) and for national security purposes (Article XXI). Likewise, Article 14 of SAFTA permits trade-restrictive measures for national security and other purposes such as public health. Neither the WTO nor SAFTA permits a country to suspend trade with another member country on grounds that it disapproves a domestic law enacted by the latter unless the law can be demonstrably linked to the general or security exceptions given in these treaties. The dilution of Article 370 is India’s internal matter. Notwithstanding how vehemently Pakistan feels about downgrading J&K’s special status under the Indian Constitution, it is unjustifiable to use this as the pretext to suspend bilateral trade relations.
Second, Pakistan also needs to reverse its practice of not according the most favoured nation (MFN) status to India. MFN is a principle of non-discrimination in trade given in Article I of GATT. Pakistan is in breach of Article I of GATT towards India since the formation of the WTO in 1995.
Third, India should restore Pakistan’s MFN status that it revoked after the Pulwama terror attack by hiking the tariff rates on all Pakistani imports to an unfeasible rate of 200 per cent. Such a move by India will put the ball in Pakistan’s court. If Pakistan fails to reciprocate, India should exert pressure on Islamabad by mounting a legal challenge showcasing how Pakistan’s actions violate international law obligations.
Fourth, both countries should dust off the GATT rule book and read Article XXIV.11 carefully. This Article allows India and Pakistan to enter into any special trading arrangement without fully complying with GATT conditions that typically apply to countries signing free trade agreements. The only requirement is that these special trade arrangements, in general, should be consistent with GATT’s objectives. This merciful rule that only India and Pakistan enjoy, out of 160 odd WTO members, was incorporated in GATT to enable the two sides to overcome the economic hardships caused by Partition. Umpteen imaginative trade deals can be struck under this rule such as creating a trade corridor from Chandigarh to Lahore or signing a trade agreement on agricultural products like sugar and cotton.
Delhi should appreciate that the rise of China, not Pakistan, poses the graver threat. A working relationship with Pakistan will release scarce resources that can be deployed against China. Strengthening bilateral trade can be an important lever towards establishing a working relationship with Pakistan.
Ranjan is Professor and Vice Dean, Jindal Global Law School, O P Jindal Global University. Views are personal