Trading Up: Pakistan, the EU and Trade as Development

“Better late than never” has never been truer. Recent reports (Financial Times, Reuters) indicate that the European Union (EU) is on the verge of reducing tariffs on a range of Pakistani exports for two to three years. The proposed reduction covers 75 products that make up between 27 and 37 percent of EU imports from Pakistan. Industry analysts estimate that the move could generate between $100m - $300m per year in additional revenues to Pakistani manufacturers. The deal is unusual under international trade rules because it waives the core principle of nondiscrimination for the benefit of one country for humanitarian reasons. The EU requested that other WTO nations who compete to export these products make a short-term exception for Pakistan in the wake of the devastating floods that took place in Pakistan during the summer of 2010. Wrangling in Brussels and between WTO members meant that the deal has been held up for 18 months. However, it now appears likely to go into effect in May or June of 2012.  By that point the deal will have been held up for almost two years, but Pakistani manufacturers certainly won’t be complaining Perhaps someone at the EU has been reading CGD’s Pakistan report, or Nancy Birdsall’s recent open letter to the Obama administration on US support for Pakistani private sector growth? More likely, EU officials have simply come to the same conclusion that CGD senior fellow Kim Elliott did in a working paper last year on U.S. trade policy: opening up markets to Pakistani products can provide a substantial boost to the Pakistani economy at a negligible cost to U.S. domestic interests. Despite the fact that it has taken 18 months of political haggling, inside and outside of Brussels, to reduce (some) tariffs , this precedent is good news. It represents a triumph of smart development policy over parochial interests. Particularly impressive is the fact that Pakistan’s arch-rival India agreed to a waiver that, in effect, increases discrimination against its own exports.  This comes on the heels of a joint statement by the Indian and Pakistani  trade ministers to double their trade volume in the next three years, and Pakistan’s subsequent promise to grant India “most favored nation” status.  Could this be a sign of more good things to come in the India-Pakistan relationship? This unusual decision by the EU raises several questions. First, if the concession is limited to two or three years, will this spur investment, or will it simply provide a short-term boost for established companies? Although the WTO explicitly warned that a waiver on humanitarian grounds  should not be treated as a precedent, it seems likely that it will be viewed as one in Pakistan. Second, with the textile industry facing “imminent collapse” due to electricity and gas shortages, will Pakistani manufacturers be able to make use of the concession? Finally, if the EU can cut through its red tape, and if India can put aside its regional rivalry with, why can’t US legislators and the Obama administration strike a similar deal to promote trade with Pakistan? Fostering economic growth is one of the top priorities of the State Department’s civilian engagement strategy for Pakistan. Building on the EU’s new trade deal might be a good way for the US to make progress towards this goal.