Pakistan agreed to normalize trading relations with India, a move that may give a boost to moribund talks aimed at improving relations between the hostile South Asian neighbors.
Pakistan’s Information Minister Firdous Ashiq Awan told a news conference Wednesday that Pakistan’s cabinet decided to grant India “Most Favored Nation” status, a decision that will likely boost bilateral trade.
“This was a decision taken in the national interest and all stakeholders, including our military and defense institutions, were on board,” Ms. Awan said.
Under World Trade Organization agreements, the MFN principle is supposed to ensure that WTO members don’t discriminate against one another, allowing all countries in the organization to benefit equally from the lowest possible tariffs.
India granted Pakistan MFN status in the mid-1990s, but Pakistan declined to reciprocate despite its WTO obligations. Both countries are members of the WTO.
Instead, Pakistan has limited imports from India to fewer than 2,000 items. Under the new arrangement, Pakistan will move to a “negative list” of goods—items of strategic importance such as defense equipment—which it will continue to ban, while allowing trade in a wider range of products.
The move is a rare goodwill gesture by Pakistan to India, with which it has fought three wars since 1947, and may help kick-start peace talks that have made little headway in recent years. The two countries have been trying to improve relations through the talks, launched in 2004 but suspended after Pakistani militants attacked Mumbai in 2008, killing more than 160 people.
The discussions started again in earnest in February after India agreed to Pakistan’s demands to broaden discussions to focus on issues such as trade and the disputed Himalayan region of Kashmir. India earlier had said it was unwilling to discuss these issues until Pakistan cracked down on militants that threaten India.
Both sides have been focusing on regular meetings of trade bureaucrats as a way to edge the talks forward, rather than hoping for a major breakthrough on more intractable problems like Kashmir, which is divided between India and Pakistan and claimed by both in its entirety.
The trade detente comes as tensions have risen recently over India’s efforts to increase its participation in Afghanistan’s economy, including spending more than $1 billion in aid to improve infrastructure and a recent agreement to train Afghan security forces.
Pakistan considers Afghanistan its backyard and is hoping to play a major role in tentative peace talks between the U.S. and Taliban fighters. It is opposed to India’s rising influence in Afghanistan.
India’s Prime Minister Manmohan Singh has said India won’t achieve its economic potential until it forges peace with Pakistan and opens trade routes toward Afghanistan and Central Asian nations.
Chandrajit Banerjee, director general of the Confederation of Indian Industry, a trade group, said in a statement that Pakistan’s decision to grant MFN status to India will help give a big jump to bilateral trade and pave the way for economic integration of South Asia.
Bilateral trade could jump to $8 billion in five years, he said. But both sides still need to address issues such as the difficulty of obtaining business visas, nontariff barriers to trade and the need to liberalize investment, Mr. Banerjee added.
Some Pakistani politicians had argued that MFN status for India should be linked to the resolution of the Kashmir issue, and the decision to move ahead anyway was a rare bright spot in relations.
Still, Pakistan’s failure to push ahead with the trials of seven Pakistani militants that it has charged in connection with the Mumbai attacks remains a major stumbling block to the overall normalization of relations between the two nations.
It is unclear whether Wednesday’s move will immediately propel trade higher, largely because nontariff barriers to trade, such as onerous labeling requirements, could still make things difficult for exporters. A highly militarized border between the two nations—with only one major overland trade post—is also likely to continue to limit commerce despite moves to expand the capacity of customs facilities at that post.
There is huge room for growth in trade. In the year ended March 31, India exported $2.33 billion of goods to Pakistan. In the same period, Pakistan sold goods valued at $332.5 million in India, according to Indian government statistics.
By comparison, two-way trade between India and China, New Delhi’s largest trading partner, is valued at more than $60 billion annually.
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