Extending Transit Facility to India: Implications for Pakistan’s Bilateral Trade with Afghanistan

The paper examines patterns of bilateral trade between Pakistan, India, Afghanistan and CARs. It also investigates whether providing India transit route to Afghanistan has opportunity costs for Pakistan’s trade potential with Afghanistan and CARs. In 2009, Pakistan’s exports to Afghanistan amount to US$ 1.3 billion which make up for 7.8 % of Pakistan’s total exports. For the same year, India’s exports to Afghanistan stand at 471 million dollars which make 0.3 % of India’s total exports. Looking at the product wise composition of Pakistan’s exports to Afghanistan, mineral fuels, oils, distillation products are on the top with share of around 29%. Salt, sulpher, earth, plaster, lime and cement and cereals have a share of around 11 %. While animal, vegetable fats and oils, cleavage products and articles of iron and steel have the share of around 7%. On the other hand, the top five exports of India to Afghanistan are man-made filaments with 42 % share, pharmaceutical products with 11 % share, electric and electronic equipment with 7% share and rubber and articles with 6% share. Clearly there is no overlap between exports of Pakistan and India to Afghanistan. Nonetheless Pakistan has already lost its market share to India in pharmaceuticals. The tariff applied to Pakistan by Afghanistan on pharmaceuticals is 2.50 % while India which enjoys Preferential Trade Agreement with Afghanistan only faces an average tariff of 0.60% on pharmaceuticals. Pharmaceuticals are Pakistan’s top performing exports to CARs with 42.5 % share of total exports to CARs. India also exports pharmaceuticals to CARs but its share in total exports to CARs is only 25.5 %. In Afghanistan, Pakistan has clearly lost its market share to India due to presence of preferential tariffs for India in Afghanistan. If Pakistan provides transit route to India for its exports to Afghanistan, cheaper pharmaceuticals of Indian origin can then be re-exported to CARs capturing Pakistan’s market share in CARs. Much like pharmaceuticals there are other Pakistani products which are likely to lose out to India in Afghanistan and CARs if India is provided transit route to Afghanistan. The Wagah-Peshawar-Torkham route which roughly extends up to 800 km is probably the shortest possible one between India and Afghanistan; which would greatly reduce the logistics cost of shipping goods from India to Afghanistan and beyond. In addition to that, the preferential treatment currently enjoyed by Indian products in Afghanistan under the PTA would further cost Pakistani goods by eroding their competitiveness in the Afghan market. In the absence of a robust mechanism to contain the informal trade, allowing Indian goods a passage through Pakistan’s territory would, in all likelihood, worsen the smuggling situation, something Pakistan can ill afford to accept. Therefore, under the circumstances, there are clear economic disadvantages to Pakistan in extending the transit facility to India without adequate safeguards and preferably a quid pro quo, be it political or economic.