Once opportunities arise

The Financial Express, October 03, 2007

Let’s rationalise trade policy. And let’s face down trade barriers. The rest will follow once other opportunities arise for mutual assurance and lasting peace, say Pradeep S. Mehta

At a recent seminar in Kathmandu on trade in South Asia, the issue of regional trade cooperation figured prominently. The meeting resolved to focus on supply-side issues, which include a rationalisation of standards and implementation of an effective competition policy and law. It is no secret that the cause of regional trade is mortgaged to Indo-Pak relations. Alas, recent incidents of two-way non-tariff trade barriers, though unconnected, only appear to stall the story. One was Pakistan’s blocking of sugar exports from India, while India blocked cement imports from Pakistan. And we wish to take the volume of trade from $1.76 billion per annum to $10 billion by 2010. Both those barriers were erected in the name of standards, but clearly, there existed vested interests behind them in the form of local producer cartels: sugar in Pakistan and cement in India. And neither country has an effective competition law.

Now, India and Pakistan are signatories to the WTO’s SPS and TBT agreements, and if these consignments are not in conformity with the stated standards, then officials have a right to hold them up. But if the same sugar is good for Indians and cement for Pakistanis, why the brouhaha?

On the other hand, both India and Pakistan argue at the WTO that there should be mutual recognition of standards and/or equivalence. If they cannot do so at the regional level, what right do they have to do so at the WTO in Geneva? Whenever either party opens its mouth in Geneva at the negotiating table, someone points this out.

Thus, the way ahead is to start identifying minimum standards and safeguards which should have mutual recognition, taking into account existing standards in the respective countries, and possibly accept them as regional standards for trade within the region. Second, they should also adopt good competition laws to foster regional cooperation under the Safta framework. Once this is done, not only Pakistan and India, but the whole developing world can demand the same at Geneva.

That traders are sometimes a little too clever is a worldwide observation. One example from Zambia beats all logic. Recently, the Zambian government confiscated sugar imports from Zimbabwe on the pretext that imported sugar is not fortified with vitamin A. No prizes for guessing who was behind this illogical standard; Zambia has just one rent-seeking sugar factory that is making a mountain out of a sugar heap under the pretence that fortified sugar is the health equivalent of iodised salt. The sobering truth is that vitamin A can easily be obtained via other food sources in a balanced diet.

Trade theory amply demonstrates that imports are an effective competition policy tool to reduce the local market dominance of domestic interest groups, a circumstance that delivers suboptimal outcomes which go against the interests of the consumer and economy at large. Domestic trade policy must never be held hostage to vested interests, and a perspective of the larger national welfare must never be lost in devising trade and other policy instruments and practices.

Engaging in mutual trade brings benefits to all. This is not rocket science, and even the common man understands this. Pointers in this direction were offered by a recent opinion poll conducted simultaneously in India and Pakistan by The Indian Express in alliance with Dawn News and CNN-IBN, as also by an NDTV 24×7 debate held in Karachi and telecast on June 18, 2007 (“Indo-Pak: Generation Gap”): people on both sides of the border feel that friendship and cooperation (read trade) are a prerequisite for improving relations between the two neighbours.

There are examples across the globe of trade playing a positive role in conflict resolution between neighbouring countries. Even regional trade agreements (RTAs) that expand trade flows, as some studies indicate, appear to have a substantial dampening impact on conflict. Mansfield & Pevehouse (2000) found that the outbreak likelihood of a militarised inter-state dispute declines by around 50% if both belong to the same regional trade agreement. As an RTA, Safta can provide institutions and a forum for the bargaining and negotiations needed to address tensions before they erupt in conflict. The EU, Asean and Mercosur are often cited as venues for improved political-military relations. In Africa, RTAs that address the management of cross-border resource issues are more effective in reducing military conflict than other RTAs.

There are examples galore of conflicts being contained by trade agreements. China imposed a ban in 2003 on Japanese rice by putting it on a list of agricultural imports deemed at risk of insect infection. But now, an agreement (“rice diplomacy”) has been signed between Japan, the world’s most expensive rice producer, and China, the world’s largest rice consumer, and this has rekindled the relationship. In 1979, Brazil signed an agreement with Argentina and Paraguay, thereby ending their dispute over the use of hydroelectric resources of the river Parana (“water diplomacy”). These are only some examples of conflict resolution through trade and economic cooperation.

So, let’s rationalise trade policy. And let’s face down trade barriers. The rest will follow once other opportunities arise for mutual assurance and lasting peace.

This article can also be viewed at: