India and Pakistan Can Do Business

A border where trade could flourish.

Photographer: Arif Ali/AFP/Getty Images

The White House has played down reports that it might reach a deal to restrict Pakistan's nuclear weapons program when Prime Minister Nawaz Sharif visits on Thursday. If President Barack Obama still wants to reduce tensions in South Asia, though, he might propose something simpler: a joint economic zone on the India-Pakistan border. 

Despite their nearly seven decades of rivalry, India and Pakistan have a bottom-line interest in increasing commerce between them. While official bilateral trade is minuscule -- barely $3 billion in 2014 -- it could easily amount to 10 times that much. Both governments lose millions in potential customs revenue to smuggling. Eliminating trade barriers would make goods cheaper for consumers and factories more competitive. 

Deeper commercial ties could in turn help ease geopolitical tensions, as they have between China and neighbors such as Taiwan and Japan. Trade volumes in the range of $10 billion to $15 billion annually could create a lobby in Indian and Pakistani business circles influential enough to steady relations. 

Nor are the two sides all that far apart. India has granted Pakistan "most favored nation" trading status since 1996, when both countries joined the World Trade Organization. Islamabad has since drastically reduced the number of Indian imports banned or subject to high duties. 

Eliminating this "negative list" entirely, however, has turned out to be inordinately difficult. Pakistan wants India to reciprocate by lowering so-called non-tariff barriers that allegedly disadvantage Pakistani producers -- everything from strict licensing and inspection rules to subsidies for Indian farmers. 

Moreover, to enjoy the full benefits of open trade, both nations would need to work at improving logistics; untangling red tape; and building new roads, ports and rail connections. They'd have to allow businesspeople to travel and invest more freely, and to remit their profits. 

Unfortunately, neither side sees much reason to compromise. India now hopes to bypass Pakistan entirely and reach Central Asia via the Iranian port of Chabahar. Islamabad has placed its faith in a $46 billion economic corridor linking its own port at Gwadar to China's massive market. Political talks have been stalled for months, with India insisting they focus only on eliminating terrorism and Pakistan demanding that the status of Kashmir be on the table as well. 

Rather than strive futilely for a major breakthrough, the two sides would be wise to look for a more limited opening. One idea is to create a jointly run special economic zone along the border that divides the Indian and Pakistani Punjabs. 

This scheme would skirt several of the most contentious trade issues. To ease security concerns, goods, workers and executives going into and out of the zone could be monitored. And for companies that set up shop inside, rules governing financing and remittances could be eased, while visa restrictions and other bureaucratic barriers were lifted. Ensuring that factories have a steady supply of power -- the biggest complaint of manufacturers on both sides of the border -- would be much easier in one designated location. 

The zone's special status would also enable the U.S. and other countries to help promote rapprochement in a non-obtrusive way. The U.S. and the European Union, for instance, might offer tariff-free access to any goods exported from the zone. Foreign companies that currently manufacture in both countries -- Honda and Toyota, for example -- could be encouraged to consolidate their operations. Indeed, Western governments might provide incentives for companies to set up joint ventures with Indian and Pakistani entrepreneurs in the zone, to make everything from sporting goods to surgical instruments. 

Ideally, initial success would fuel enthusiasm among the local business community for widening the experiment -- and make more difficult conversations between the nuclear-armed neighbors just a little bit easier.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.