On Wednesday, this writer had the opportunity of seeing young children play on the Upper West side of Manhattan.

Ineluctably, conflict arose over who gets to play with which toys? At first, child A would deny child B access to all toys except for one or two that she considered worth sharing. Child B, in turn, would reciprocate with a similar kind of exclusion rule. As the evening went on, the children interacted more and got to know each other better. The toy sharing arrangement changed as well. Child A would now allow child B the right to play with all her toys, except for one or two that she considered truly precious. Child B, presumably in a fit of solidarity, inversed this rule as well. As a result, the total number of toys the children could play with increased. Economists might say, "welfare" had truly increased via trade.

Any observer of India and Pakistan's trade relations will recognise the similarity in above real life example and the two countries' trading histories. Amidst all the furore of memogate and the attacks on soldiers in Mohmand tribal regions in North Western Pakistan, a truly momentous process is underway.

The Pakistani cabinet has asked its Ministry of Commerce to "move forward" on granting India the Most Favoured Nation status (There is still some confusion whether Pakistani parliament must ratify such decisions or if it is just the cabinet's to decide, as Prime Minister Gilani suggests.)

Understandably, given the history of the two countries, in Pakistan's Right wing and military there has been some consternation as well. It doesn't help that the Urdu press translates the MFN status as "pasandeeda mulk", a term that is decidedly more positive and softer than the technocratic "most favoured nation" title.

Lasting gains

Irrespective of their angst, for now, the pro-trade groups seemingly have prevailed for. Nearly 15 years after India granted Pakistan the MFN status in order to comply with the extant World Trade Organisation rules, Pakistan's actions must be welcomed. While the prospect of peace is contingent on matters beyond trade, but trade can lead to other lasting achievements.

MFN status has been around in one form or the other between kingdoms since the 12th century. In more recent past, and thus consequential, in 1778, the Treaty of Amity and Commerce signed between France and the United States was an early precursor to the WTO/GATT based MFN rules. The intrinsic idea of an MFN is relatively simple: if country A grants country B the MFN status, then country A agrees to treat goods from country B on the same footing as the rest of the world, in so far as levies, duties and tariffs are concerned.

What does this status change mean for India and Pakistan?

Prior to the MFN status, Pakistan's trade policy had an explicit "positive" list. This was a list of 1,945 odd items that were explicitly tradeable. The rest, well, couldn't or needed to make its way through the UAE and be relabelled etc., The end product costs were 30-45% higher, in some cases. Much like the children in the example above, Pakistan prevented direct trade with India on all goods except for the ones they chose to import from India.

7,000 products

With this new "status", Pakistan will allow over 7,000 products to be imported from India. The "positive" list will be replaced with a small "negative" list of goods that will be prohibited. Over the next two years, both sides expect that this "negative" list will be removed as well. i.e., a full fledged trading relationship will commence between the two.

But there are real challenges that continue to abound. The list of tradeable goods allowed via road is still small. The Pakistani newspaper Dawn reports "on the Indian side of Wagah, only two trucks can be loaded and unloaded at a time."

Travel restrictions continue to slow movement.

There is also a larger question that is, as of now, unanswerable. Classical trade theory, particularly the Stolper-Samuelson theorem, claims that when trade is liberalised holders of the relatively abundant factors of production benefit, while holders of relatively meagre factors of production will be hurt. Only time will tell, whether Pakistan's polity might have such reconfigurations due to the impact of trade with India. But, what is, however, clear, is that trade will create winners and losers on both sides of the India-Pakistan border.

And any notion of peace will be contingent on how the losers from trade are accommodated and helped.

 

The columnist works for a major European investment bank in New York City. All opinions are personal and don't reflect any institutional perspectives.