Washington’s Dangerous New Consensus on China
Don’t Start Another Cold War
Smuggling is typically thought of as a vice, but in the context of India-Pakistan relations, it has become a virtue. Since their partition in 1947, the two countries have had tense ties. Each state has a long history of trying to suppress trade with the other through tariffs and other legal barriers. And those barriers have generally proven effective: India and Pakistan have rarely conducted more than 2 percent of their total trade with one another. Politicians from each country have occasionally broached the subject of a normalized trade relationship, but trade talks have tended to be interrupted by diplomatic and military hostilities, including the 1998 Kargil War, the 2003 Indian Parliament attack, and 2008 Mumbai terror attacks.
But if the governments of India and Pakistan have had trouble establishing a productive relationship, businesses on both sides of the border have not. Unable to rely on policymakers to smooth the way for trade, they now routinely conduct business with their counterparts through Dubai. Under most readings of Pakistani and Indian law, smuggling operations of this sort are illegal. But if Pakistan and India ever manage to overcome their enmity, these smugglers will deserve a great deal of the credit.
The volume of illicit smuggling between India and Pakistan is estimated to be anywhere from $2 billion to $10 billion per year. Commodities smuggled from Pakistan to India include bed sheets, embroidered cottons, and dry fruits; silk, pharmaceuticals, cosmetics, costume jewelry, spices, and tires are among the commodities routinely smuggled in the opposite direction. “There is some realization that stopping trade is not really working for us,” Loknath Acharya, assistant director of the Federation of Indian Chambers of Commerce and Industry (FICCI), told me. One leading Pakistani entrepreneur admitted to me that there is an “undocumented parallel economy” between Pakistan and India.
Indian and Pakistani businesses typically arrange these exchanges in small countries with liberal banking regulations, including Hong Kong and Singapore. But Dubai plays an especially important role. In part, that is for historical reasons. Dubai-based smuggling dates back to the 1960s, when India placed capital controls on gold imports in order to contain spiraling trade deficits, and businesspeople from both India and Pakistan were in search of places to operate outside the watchful eye of their respective states. The most influential Indian and Pakistani business organizations in Dubai -- the India Club and the Pakistan Association -- date back to this period. The presence of Pakistani and Indian firms in Dubai increased dramatically beginning in 1996, when Dubai’s ruler, Sheikh Mohammed, invited businesses from those two countries to invest in the country’s infrastructure and its manufacturing sector.
There is some disagreement as to whether the trading conducted between Pakistan and India in Dubai should be called “smuggling” at all. Some argue that the term implies a transaction in illicit goods, such as narcotics and weapons, whereas Pakistani-Indian trading primarily involves consumer goods. Ahmed Chinoy, chair of Pakistan’s Cloth Merchants’ Association, describes the process in relatively innocuous terms. “Pakistani fabrics go to India through alternate channels to Dubai, and payments are sent back to Pakistan through such channels,” he told me.
In truth, entrepreneurs in both countries are most likely aware that even trades involving fabric and cosmetics break laws and skirt tariffs. When Indian goods are unloaded in Dubai, an elaborate process is undertaken to conceal their origin: tags are changed, embossing is ground off, packaging is removed, and Indian newspaper used in shipping containers for padding is exchanged with Arabic newsprint. After all that, the traders can obtain a new certificate of origin from the local chamber of commerce.
The question now is whether the Dubai-based trade between India and Pakistan can drive a broader economic and political rapprochement between the two countries. Policymakers in each country have mostly downplayed or ignored existent (if illicit) trade ties. Since 1997, politicians in both countries have been conducting what they call the Composite Dialogue Process to explore normalizing relations; despite many setbacks and scarce progress, they seem to prefer that their top-down and slow diplomacy not be interrupted. Part of the reason they have been able to ignore the prevalence of smuggling is that it doesn’t happen in the open. “We don’t know the quantum of that trade,” says Pranav Kumar, director of International Trade Policy at the Confederation of Indian Industry. “Who will verify that? We do believe that informal trade is happening. How much? We don’t know.”
But businesses involved in smuggling have found other avenues to air their opinions. One of their strategies has been to lobby the official business associations in their respective countries. Those established organizations then put pressure on their governments to normalize trade. Consider Pakistan’s restrictions on the import of machine parts. Beginning in the early 2000s, Pakistani businesses began importing parts manufactured in the Indian city of Chandigarh for use in sugar mills in Pakistan’s Sindh and Punjab provinces, by way of Mumbai, Dubai, and then Karachi. In 2008, the organizers of this smuggling operation approached the Pakistan Sugar Mills Association to lobby the Pakistani government for the normalized import of these parts. In 2010, the association soon succeeded in having these items added to Pakistan’s list of permissible Indian imports.
Of course, it is an open question whether this is a sustainable method of broadening trade ties between the countries. The association’s laborious effort succeeded in only normalizing trade for a single commodity; there was no domino effect that had a positive influence on other industries. And, rather than offer a more fundamental challenge to the government’s policies, industries were forced to argue for an exception to the government’s existing rules rather than a change to them. (It is probably no coincidence that Pakistani Prime Minister Nawaz Sharif happened to own numerous Pakistani sugar mills that profited from the reversal on machine part imports.) Shunaid Qureshi, chair of the Pakistan Sugar Mills Association, explained that it was unrealistic to expect lobbying of this sort to have a wider impact on trade normalization, since business associations “do not lobby collectively across sectors.” Textiles, sugar, and cement, he said, are represented by separate government ministries.
Rather than plead their own case to their respective governments, it may be more effective for industries in India and Pakistan to back objective, nonpartisan research into the state of trade ties. Four independent research groups -- the Indian Council for Research on International Economic Relations (ICRIER) in Delhi, the Institute of Business Administration (IBA) in Karachi, and the Lahore University of Management Sciences and the Sustainable Development Policy Institute in Islamabad -- have recently generated influential reports on official and unofficial trade barriers in both countries, and how they have produced widespread smuggling. Each government has found ammunition in these reports to use against the other. But, taken together, the reports have also opened the way for discussions about the deep flaws of the current legal framework. ICRIER and IBA have since initiated a series of bilateral roundtables on trade opportunities in agriculture, automobiles, pharmaceuticals, and textiles.
Of course, to some extent, trade ties between these two countries will always be hostage to political events. But if Narendra Modi is elected India’s prime minister later this month, as he is expected to be, it would likely be good news for the country’s economic ties with Pakistan. Modi is leader of the BJP, a Hindu nationalist party, and as a result has long been considered to have an animus toward Muslim-majority Pakistan. But Modi’s record as chief minister of the Indian province of Gujarat -- which manufactures the majority of textiles and costume jewelry smuggled to Pakistan via Dubai -- suggests that he would be a strong proponent of trade normalization. Under Modi’s leadership, the Southern Gujarat Chamber of Commerce and Industry (SGCCI) in the Gujarati port city of Surat closely collaborated with the Karachi Chamber of Commerce and Industry to lobby the Indian and Pakistani governments for trade normalization. In December 2013, Modi’s government gave political and financial backing to the SGCCI to invite a substantial number of Pakistani delegates to a trade fair.
The only people in Pakistan and India who would not benefit from normalization of trade ties would be the smugglers who are currently facilitating the illicit trade (and helping themselves to a cut of the profits). But their protests would most likely be drowned out by the cheers from the consumers and businesspeople in both countries who stand to gain.