India-Pakistan trade liberalization: A CGE modeling approach

Abstract

With intra-regional trade accounting for only 5 % of its total trade, South Asia is probably the least integrated among the various regional groupings in the world. The principal reason is the mistrust between the two largest nations of South Asia—India and Pakistan. Of late, positive signals from the policymakers of the two countries seem to indicate that the worst is over. There have been moves toward normalizing trade between India and Pakistan, which augurs well for the economies of both nations. Though India gave Most Favored Nation (MFN) status to Pakistan in 1996, there are now signals from across the border indicating that Pakistan will shortly grant MFN status to India. In this context, this chapter attempts to assess the impact of bilateral trade liberalization on both economies and on the rest of South Asia. Our results indicate that there are significant gains from India-Pakistan mutual trade liberalization. However, these gains are realized only when productivity gains occur in the modes of transport services involved in trade between these two countries. This is expected, given the logistics problems in trade between India and Pakistan.