miniscule fraction of this trade is within the SAARC region. Moreover, the two largest economies
of South Asia, India and Pakistan, are also the least focused on intra-regional trade. While India
has granted Pakistan a Most Favoured Nation status, which is now quite common under the
GATT/WTO protocols, Pakistan has not reciprocated; and this has been a bone of contention
between these two countries. While Pakistan has linked this with a resolution of the core issue
of Kashmir, India has retaliated by trying to keep Pakistan out of other regional and international
networks, such as the Indian Ocean consultative process. In lieu of granting MFN, Pakistan has
maintained a ‘positive list’ of items on which it would allow trade with India and in 2006 this list
extended to over 750 items.
Meanwhile, within the SAARC framework, there is a process of moving towards a South Asian
free trade area. The signing of a South Asia Preferential Trade Agreement (SAPTA) in 1996
was followed by further negotiations on trade liberalization. These culminated in the signing of
the South Asian Free Trade Association (SAFTA) that came into effect on July 1, 2006. Under
this, all items would be open to free trade, except for a restricted ‘negative list’ that members
could retain. In July 2006, Pakistan announced that in the case of India it would retain its
‘positive list’, coupling the move to free trade with a resolution of the Kashmir dispute. India has
reacted negatively to this proviso, and the matter still remains unresolved. In the meantime,
trade with India has increased to over one billion dollar, whereas actual trade either through
smuggling or via the Gulf States is already considerably higher. In the next few years India-
Pakistan trade flows should gain further momentum. Pakistan has also moved in line with World
Trade Organization (WTO) thresholds towards import liberalization; and indeed the subsequent
hike in imports created a worrying trade imbalance in 2006. There is a fear that a recurring trade
gap would lead to a return to current account deficits could only be forestalled by either reducing
imports or raising exports, both of which appeared problematical. Without these rectification
measures, the Pakistani Rupee could begin to come under pressure, as it had been devalued
vis-à-vis the US dollar almost 10% per year in the 1990s.
One of the problems Pakistan continued to face was the lack of diversification in exports. These
remained heavily concentrated in a few commodities: three quarters were in the light
manufactured goods, comprising cotton, synthetic textiles, leather goods, garments, knitwear
and rice. The export destination was about 40% to the United Sates, around 25% to the
European Community, and 25% to Asia (of which 8% was to China ,including Hong Kong) but
only 1% to India. With concentration in commodities and with weak bargaining power
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