India at Disadvantage By Cutting Trade-Ties, MFN Status with Pakistan: Experts

Tade and investment in Pakistan presented many challenges and opportunities for Islamabad. The opportunities were provided in the form of financial assistance and investments while challenges came from India – who removed the MFN status after the Pulwama attack.

Trading patterns are analysed with the help of data from Trademap Pakistan imported more than $2.7 billion of goods from Saudi Arabia and $1.7 billion of products from India in 2017. Saudi Arabia is the fourth largest source of imports into Pakistan while India is the seventh largest source.

Furthermore, Pakistan imported $7.5 billion of goods from the UAE in 2017, its second largest source of imports after China. Therefore, recent developments will impact the trading patterns for Pakistan.

According to data from BP’s Statistical Review of World Energy 2018, Pakistan consumed approximately 589,000 barrels of oil (bpd) per day, witha growth rate per annum of 4.8% between 2006 and 2016. On the other hand, its refining capacity was only 401,000 bpd, increasing 3.7% per annum between 2006 and 2016.

Pakistan imported $13.7 billion of mineral fuels in 2017 and $3.1 billion of crude oil, mainly from Saudi Arabia and the UAE. Mineral fuels constitute 54% of total imports from Saudi Arabia and 85% of imports from the UAE. However, 88% of the mineral fuels imported from Saudi Arabia comprised crude oil, with considerably smaller amounts of other forms of mineral products.

On the other hand, approximately 30% of the mineral fuels imported from the UAE were in the form of crude oil. Pakistan imported $4.3 billion of furnace oil, high-speed diesel and motor spirit from the UAE in 2017.

With a $10-billion oil refinery planned to be built in Gwadar, which is expected to slash imports of refined petroleum products into Pakistan, imports of crude oil will likely increase. The refinery is expected to produce 300,000 bpd. Once it starts operations, the composition of mineral fuel imports will likely shift towards crude oil, substituting the imported refined petroleum products. With Saudi Arabia as an investor and a major supplier of crude oil, imports of crude oil from it may further increase. In the short run, imports of plant, machinery and equipment will increase in total imports. In the long run, the reliance on imported refined petroleum may fall.

However, it is essential that the government boosts exports of refined products as well as develops complementary downstream industries, such as petrochemical and other synthetic products that can benefit from the refined as well as residual products produced by the new investments. Even though profit repatriation is expected from foreign investors, better trade policies will help decrease the current account deficit.

Imports from India fall

India recently retracted the most favoured nation (MFN) status awarded to Pakistan, imposed additional tariffs on goods imported from Pakistan, cancelled export orders from Pakistan and banned the export of certain products to Pakistan such as tomatoes.

According to the data extracted from Trademap.org, Pakistan exported $335 million of goods to India in 2017, which was approximately 1.5% of total exports from Pakistan. The range of products exported was limited, mostly comprising cement, gypsum and dried dates.

Pakistan exported $90 million worth of fresh or dried dates, $65 million of Portland cement, $14.4 million of medium oils and preparations, $13.9 million of gypsum and $13.6 million of tanned leather. Pakistan is by far the largest source of Portland cement and fresh or dried dates into India. Pakistan is also one of the leading exporters of Portland cement and dried dates around the world. In essence, exports from Pakistan to India are limited to a few products in which Pakistan has a relative advantage in the global market.

Furthermore, cement and dates contributed only 1.4% of total exports from Pakistan to all its trading partners in 2017. On the other hand, out of $1.7 billion of goods imported by Pakistan from India in 2017, $555 million was paid for chemicals or allied products, $203 million for raw cotton, $141 million for cotton yarn and $68 million for polymers of propylene in primary form. In essence, India supplied mainly raw material and intermediate goods to Pakistan.

Pakistan reduced imports of vegetables from India in 2017. For instance, it imported more than $100 million worth of fresh or chilled tomatoes from India in 2016, approximately 86% of total import of the commodity from all partners. However, in 2017, it stopped the import of tomatoes.

Similarly, more than 50% of the total raw cotton imported into Pakistan was sourced from India in 2014 and 2015. In 2017, the share of Indian raw cotton fell below 27%.

The United States replaced India as the largest source of raw cotton as $279 million worth of the commodity was imported from it. This is primarily due to the resurgence of the US as a significant exporter of raw cotton globally.

Furthermore, Saudi Arabia has been a major source of polymers of propylene. In essence, Pakistan has shifted away from Indian imports, replacing it with other sources.

According to the World Bank’s “Glass Half Full: The Promise of Regional Trade in South Asia”, trade potential between Pakistan and India is estimated at $37 billion. Uncertainties in the relationship between the two countries not only impede trade but have rather led to trade diversion in recent years.

Considering the recent economic opportunities and challenges, Pakistan must further strengthen its trading relationship with important trading partners by pursuing trade and investment agreements. It must take full advantage of the renewed geopolitical and economic interests.

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