Myths surrounding free trade with India

The author is an Islamabad-based freelance columnist

farrukh15@hotmail.com

Myth No 1: Free trade with India will increase unemployment in Pakistan

Cheaper imports from India could mean that Pakistani workers in some sectors will loose their jobs. Cheaper products from India also mean that our own industry producing the same goods is inefficient, less competitive or both. If some sectors within our industrial base are inefficient that means we are wasting our resources - land, labour and capital - on producing such goods. If the same scarce resources - land, labour and capital - are moved out of the inefficient sectors and diverted towards the more efficient sectors of the economy the net level of employment shall increase. In other words, shifting of resources from less productive sectors to more efficient sectors of the economy shall be a plus for the labour market.

Furthermore, level of unemployment in a particular economy is directly dependent on factors such as the monetary policy (money supply and the rate of interest), the business cycle, wage elasticity and flexibility in the labour market. To be sure, all of these are non-trade factors. In essence, level of employment or that of unemployment in Pakistan is not a trade issue. Over the medium to long term, cheaper imports from India shall mean a higher purchasing power for Pakistani consumers and as a consequence a higher standard of living.

Here is evidence from the United States. Exactly 20 years ago, total imports into the United States were 300 percent lower than what they are now. While accumulated imports almost tripled, the total number of American civilians employed has gone up by more than 30 million. This evidence suggests that, over the longer term, there actually is a positive correlation between imports and the level of employment.

Pakistani trade protectionists often claim that exports create jobs and imports kill jobs. The first part of the claim is certainly true. The second part of the claim is actually based on a mistaken belief that the total number of jobs in an economy is fixed. Take steel, for instance. If Pakistan imports cheaper Indian steel then Pakistanis working in the steel producing industry may end up loosing jobs (to be trained for other jobs). Pakistani steel users, on the other hand, having access to a cheaper input shall become a lot more competitive and thus expand. That means cheaper buses, trucks, tractors, bicycles, motorcycles and everything else that has steel in it. Economic history suggests that there shall be a net increase in employment.

According to Daniel Griswold, a leading researcher of trade issues, the "argument that imports cause a decline in net employment is not only wrong; it is the exact opposite of the truth."

Myth No 2: Import restrictions on Indian products are in the interest of Pakistan

What does Pakistan get by depriving its own industry access to cheaper Indian inputs? If Pakistani consumers are being made to pay more for consumer products produced locally then the Government of Pakistan (GOP) is responsible for axing down an average Pakistani's purchasing power. What do we as a country get in return for punishing our own consumers and perhaps the poorest and the most vulnerable in the society? If medicines, potatoes or sugar is cheaper in India why not let all Pakistanis benefit from it.

Myth No 3: Free trade with India will compromise our national sovereignty

The choice is between prosperity and poverty. Sovereignty has little or nothing to do with open markets. The issue is whether protected markets bring in prosperity or is it open markets that do that.

Myth No 4: Tariff restrictions on Indian imports are in our interest

In all honesty, import duties imposed by the GOP are just another form of taxation on Pakistani consumers. Import duties are not paid by Indian exporters but come out of Pakistani importers who then pass them on to Pakistani consumers.

Myth No 5: Free trade with India will hurt an average Pakistani

If we allow our resources to flow towards the most efficient sectors of our economy Pakistanis shall benefit in terms of higher wages and better quality jobs. Protectionism hurts all consumers (and we are all consumers). Trade barriers don't save jobs over the long run; they merely extend the pain of closing down inefficient producers. Import restrictions in essence try to save unproductive domestic industry while ignoring that the very act is destroying jobs in more efficient sectors. That amounts to encouraging inefficiency and discouraging efficiency. Restricting our productive capacity to what we do best shall not only increase productivity but incomes along with it.

Myth No 6: Free trade with India will increase our trade deficit

Opening up one's border for free trade always has a transition cost attached to it. Pakistan's trade deficit may or may not increase if we open up our border to India. It depends on how efficient the two industrial bases are vis-‡-vis each other.

Myth No 7: Large Indian companies shall overwhelm us

In international trade large is not essentially better. It's efficiency and competitive advantage that matter. The two Koreas are a case in point; same country, same starting point, same people but different choices. Some fifty years ago, South Korea elected to trade with the world. North Korea, on the other hand, chose the path of isolation. As of last year, the per capita income (PPP) in South Korea was $13,300 while in the North it hovers around $1,000. Industrial growth rate is 22 percent and one percent for the South and the North, respectively. South Koreans have 23 million telephone lines and 9 million mobile cellular. In the North, there are 1.1 million telephone lines and no mobile.

Burma and Thailand are next-door neighbours with a border that stretches some 1,800 km. Some 30 years ago, Burma began erecting a wall of isolation around it while Thailand decided to trade with the world. Burma, as a result, remains stuck to the last century. Burma's two-way trade with the rest of the world remains under $4 billion a year and per capita income (PPP) is at $1,200. More than 25 percent of the population lives below the poverty level and the entire country of 41 million has 158,000 telephone lines (the latest estimate available is for the year 1995). Thailand's two-way trade now exceeds $100 billion and the economy was the fastest growing for the decade of 1985 to 1995. Per capita income of $6,400 and a total GDP approaching $400 billion.

Here's another comparison. After more than 53 years of independence, Pakistan's two-way world trade remains under $20 billion. That's the equivalent of $135 on a per capita basis. The same figures for South Korea and Thailand are $5,500 and $1,600, respectively.

Vajpayee and Bandaranaike have already inked South Asia's first free trade agreement (FTA). Bhutan and Nepal have traditionally had free trade arrangements with India. Pakistan has also signed on the dotted line. Under the WTO we are obligated to open up within the next few years.

There is little doubt that opening up trade with India shall mean temporary job dislocations along with transition costs on either side of the LOC. In Pakistan, that could involve some two to three million workers or around five to eight percent of the total labour force. These transient costs, however, should not be a cause for us to sacrifice the lasting benefits of free trade.