India At 70: Unwinding Partition With GATT
From Freedom To Unfreedom At Midnight
When freedom came to India and Pakistan on a midnight in August 70 years ago, the Radcliffe Line put a border at Wagah (or, to Pakistanis, Wahga) where none had been before. Pre-Partition, trade in agricultural and industrial goods, and in services, flourished. Post-Partition, the trade never recovered to what it was.
Thanks largely but not entirely to the British, who excel at partitions and now are self-destructively self-partitioning from the European Union with Brexit, a unified, reasonably well-functioning Subcontinental economy – albeit one plagued by periodic famines – disrupted instantly amidst the largest exodus in human history -- 10-14.5 million refugees, with 1-2 million deaths.
Famously, Partition meant political “Freedom at Midnight,” the title of the classic history by Larry Collins and Dominique Lapierre (1975). Infamously, Partition meant economic “Unfreedom” at Midnight, to borrow a concept from Development as Freedom (1999), by India’s Nobel Prize winning economist, Amartya Sen.
Economic history could have been different. The General Agreement on Tariffs and Trade, which the British were instrumental in drafting in 1946-47, offered India and Pakistan a special rule to maintain their robust pre-Partition trade. Both countries, though original contracting parties to GATT, failed to trigger that rule, Article XXIV:11.
Past is not prologue. The rule sits in the treaty, awaiting use, if the two natural trading partners can develop a joint 21st century economic narrative that overcomes their divisive 20th century individual political narratives.
The economy of British India was what in GATT terms is a “customs union.”
No tariffs, no non-tariff barriers, no anti-dumping or countervailing duties, no safeguards. Farmers, manufacturers, and service providers faced constraints in shipping across what is now India and Pakistan, from financing to infrastructure, but internal trade barriers were not among them. British India boasted another feature of a customs union, namely, a Common External Tariff. Levies on imports were unified, whether merchandise entered at Karachi or Bombay. In the 1920s, the CET on cotton was raised to protect those in the Subcontinent from Japanese competitors. The CET meant the Subcontinent was one step more integrated economically than if they had a free trade agreement. Parties to an FTA drop all internal trade barriers – like a customs union – but retain their individual trade barriers vis-à-vis non-parties – unlike a customs union.
Post-Partition asset swaps are one of the least appreciated illustrations of pre-Partition Subcontinental free trade. As midnight of August 15, 1947, neared, some textile producers – Hindus in Pakistan and Muslims in India – realized they would need to migrate across the Radcliffe Line. They had known each other for generations through their long-established ordinary course of business.
These ‘anticipatory refugees’ smartly opted to trade their fixed wealth, that is, their textile factories, homes, and properties, with appropriate price adjustments.
Hindus from Karachi and Lahore shifted into the Muslim assets in Mumbai and Amritsar, and vice versa. Textile production thereby could continue amidst the hell the non-anticipatory refugees experienced, but free trade in textiles could not, or rather did not.
Empirical data from the years after Partition reinforce the anecdotal evidence that pre-Partition trade was robust.
- A May 2012 U.S. AID report discloses that in 1948-49, 23.6 percent of Pakistan’s global exports went to India, and 50.6 percent of Pakistan’s global imports came from India.
- A 2013 Wilson Center report provides nearly mirror-image numbers, saying “[i]n 1948-49, Pakistan’s exports to India accounted for 56 percent of its total exports, while 32 percent of Pakistan’s imports came from India.”
- Still, other another study – from 2005, in the State Bank of Pakistan Research Bulletin put Pakistan’s exports and imports to India as high as 30 percent and 10 percent, respectively.
Regardless of the exact figures, it’s clear each was a major market for the other.
Indeed, until 1955-56, India was Pakistan’s biggest trading partner.
Alas, disputes mounted, as the U.S. AID report chronicles. In June 1948, the two countries sparred over currency manipulation: was one undervaluing its currency relative to sterling to boost exports? One year after Partition, in August 1948, Pakistan said Indian raw jute could not be imported without a license. Two years after Partition, Pakistani businesses boycotted Indian-made goods in retaliation for India’s Evacuee Property Ordinance. (On that Ordinance, see this 1951 article by Joseph B Schectman.)
In October 1949, Pakistan’s Finance Minister, Ghulam Mohammad, told a Karachi audience that some articles “imported from India had been removed from the exemption lists for import duty.” India retaliated: Commerce Minister KC Neogy told the Lok Sabha that India suspended exports of coal to Pakistan, “because Pakistan had deliberately detained enormous quantities of jute purchases paid by India nationals.”
Trade declined, plummeting to zero following the 1965 India-Pakistan War, as Table 1 shows. Since that conflict and the 1971 War, India-Pakistan trade never recovered to the levels around the midnight of Partition. Filling the void were stories on either side of the Radcliffe Line to fit political narratives. Pakistanis thought Indian potatoes were poisoned, Indians thought Pakistanis smuggled contraband.
In sum, the British messed up a single economic entity. But once their militaries crossed the Radcliffe Line, and they lifted barriers to free trade in mutual vitriolic suspicion across that Line, India and Pakistan finished off the demolition job.
What About MFN Treatment?
Ironically, the demolition was illegal. Having signed GATT on October 30, 1947, India and Pakistan were obliged to offer each other immediate, unconditional Most Favored Nation treatment. They ignored the GATT Article I:1 MFN clause, and restricted bilateral trade to “Positive Lists” – schedules of products each could import from the other. Following the 1972 Simla Agreement, trade picked up, but at an anemic pace, and neither side showed ambition to expand its Positive List.
Not until 1996 did India grant Pakistan MFN treatment, which it did unilaterally, along with eliminating its Positive List. Not until November 2011 did Pakistan reciprocate in granting India MFN treatment. Pakistan was relatively more concerned than India with linking MFN status to a settlement of the Kashmir problem.
In 2012, Pakistan eliminated its “Positive List” of 2,000 items that could be imported from India and replaced it with a Negative List of 1,200 items (over 500 of which were auto, iron, and steel products) that could not be, plus a yet-unfulfilled pledge to eliminate the Negative List entirely.
GATT Article XXIV:11
The politics of Partition trumped its economics. Officials in Delhi and Islamabad saw the 3,323-kilometre land border delineating Punjab, Rajasthan, and Gujarat from Punjab and Sindh as a political nightmare, not an economic opportunity to be seized with Paragraph 11 of GATT Article XXIV. They still do.
Here’s what this obscure provision, along with its Interpretative Note (Ad Article XXIV, Paragraph 11) denoted by the asterisk, says (emphasis added):
“Taking into account the exceptional circumstances arising out of the establishment of India and Pakistan as independent States and recognizing the fact that they have long constituted an economic unit, the contracting parties agree that the provisions of this Agreement [i.e., GATT] shall not prevent the two countries from entering into special arrangements with respect to the trade between them, pending the establishment of their mutual trade relations on a definitive basis.*
*Measures adopted by India and Pakistan in order to carry out definitive trade arrangements between them, once they have been agreed upon, might depart from particular provisions of this Agreement, but these measures would, in general, be consistent with the objectives of the Agreement.”
What does this GATT-speak mean in English?
That India and Pakistan can forge a Special Trade Deal that is not a customs union, nor even an FTA. An STD is a good starting point, given that long lists of product exemptions curse the South Asia Free Trade Agreement.
Consider the difference. Other than India and Pakistan, all WTO members seeking to integrate their trade relations must go right to an FTA or a customs union. So, all other members must satisfy the four mandates in Article XXIV for an FTA or a customs union:
- Eliminate barriers on “substantially all” trade between the countries (Article XXIV:8(a)-(b)). There is no set definition here, but an 80 percent benchmark is often mentioned.
- Be sure their trade barriers relative to third countries (those not in their FTA or customs union) are “on the whole higher or more restrictive” than what before their agreement (Article XXIV:5(a)-(b)). This stricture entails an overall assessment of tariffs and quotas under the status quo ante versus the new status quo.
- Plan for their FTA or customs union to take effect within a “reasonable” time (Article XXIV:7(b)-(c)). This term also is ambiguous, but more than 15 years, though not unprecedented in U.S. FTAs, seems ridiculous.
- Notify, consult with, and report to the other GATT-WTO countries (Article XXIV:7(a)). This duty of good world citizenship allows the WTO Secretariat to keep tabs on sub-multilateral trade deals to ensure they comply with the first three mandates.
In contrast, India and Pakistan have nearly a carte blanche to start an STD, without having to fret about these four strictures. If their STD is “in general … consistent” with the mandates, that’s fine, at least until they develop a “definitive” FTA or customs union. Manifestly from the first clause of Article XXIV:11, the drafters of GATT (even, or especially, ones in London's Whitehall) understood Partition could vitiate free trade across the Wagah region and beyond.
The “exceptional circumstance” of Partition led them to carve out an exceptional rule that no other GATT contracting party, nor any WTO member, has ever had.
Call it a merciful rule that grants India and Pakistan forgiveness in advance to violate their GATT obligations, in pursuit of their greater collective good of keeping their trade flowing.
Did India and Pakistan ever contemplate invoking Article XXIV:11?
One clue they might have comes from March 11, 1949, just 14 months after GATT took effect on January 1, 1948. Jawaharlal Nehru's Minister of Commerce, KC Neogy said in Parliament that a joint economic policy between India and Pakistan was “supremely necessary”.
Minister Neogy revealed that India already was negotiating “in a very informal way” with Pakistan for a customs union.
Let’s fast forward to a hypothesis: the two sides pick up where they left off that February after Partition. Assume they can put politics aside, and decouple the Kashmir conflict from trade relations. What might an Indo-Pak STD look like?
Here are a few possibilities that would not cover “substantially all trade” between the two countries, leave barriers to third countries untouched, and could take 15 or so years to phase in:
- Punjab STD: Complete free trade, in agricultural and industrial goods, and services, across the Indian and Pakistani Punjab, which originate in either of the Punjabs. This deal could reintegrate the great Punjab, enlarging the markets for producers and consumers from Chandigarh to Lahore.
- Farm (खेत in Hindi, or فارم in Urdu) STD: Complete free trade in all primary and processed agricultural goods that originate in India or Pakistan. This merchandise would receive duty-free, quota-free treatment, allowing for greater production efficiencies and lower prices.
- Green STD: Complete free trade on a list of environmentally friendly goods and services that originate in India or Pakistan, such as organic produce, bicycles, solar panels, and recycling services.
- Healthy STD: Complete free trade in medical, dental, veterinary, nursing, midwifery, and hospice services originating in India or Pakistan. This sectoral services deal would enhance delivery of quality care, especially to the poor, infants, mothers, and the elderly.
Hybrids are possible, too, such as a Green-Punjab STD.
There would be key details, like rules of origin, to establish. Chinese cell phones should not qualify as Pakistani, nor should books printed in Bengal seep into a Punjab STD stream of commerce. Enforcement experiences of other countries with free trade zones may be useful for India-Pakistan authorities.
Helping “losers” from free trade (e.g., members of the Pakistan Association of Automotive Parts and Accessories Manufacturers, which will be hard-pressed to compete with their Indian counterparts) through appropriate tariff phase-out periods and trade adjustment assistance will be essential to overcome opposition to an STD. But, such issues (including the sensitivity of auto trade) are familiar in extant FTAs (like NAFTA), so here, too, lessons from others may be useful.
Besides, working together on STD technicalities would be a confidence-building measure (CBM) that could lessen tensions between the two arch-rivals.
GATT Article XXIV:11 is not a panacea to unwind Partition and create an “IPU” – Indo-Pakistani Union – akin to the European Union overnight. A complete unwinding is not, or not yet, realistic goal, nor is it a popular one. From Trump’s NAFTA re-think to Netanyahu’s Levantine barriers, walls are the rage. Why, Saudi Arabia, Bahrain, the UAE, and Egypt, have put up one with Qatar, wrecking an entire customs union, the Gulf Cooperation Council, and veiling the free speech of Al Jazeera.
Indian and Pakistani officials must decide who their role models are, the current crop of wall contractors, or the drafters of GATT. Wagah is a good place to mull over the question, as this columnist did.
As the Wagah gate closes every sunset, melancholy – the sense of what might have been – overwhelms the British legacy of a ceremony that is over-the-top in pomp and circumstance. Ostensibly, the Indian side is happier. The Pakistanis sit placidly but lugubriously in their stands, somewhat segregated by gender and treated to mostly religious statements blaring from loud speakers. The historically counter-factual contention that Muslims might have been better off in a unified, Hindu-majority India than in a Muslim-majority Pakistan forgivably looms on the Indian side. Smiling and chattering away, the unsegregated Indians listen to Bollywood music. Colorfully-clad women dance to its beat right up to the gate. Literate or not, they know India has managed a secular democracy with consistent transitions of power through the ballot box.
But, peer further, beyond the gate, on both sides, which this columnist has been. Lorries line up, hoping to cross the next day with modest cargos, symbols amidst the smells and dust of underdevelopment, of economic inactivity, of what could yet be.
The other Indo-Pak trade links tell a similar tale. These links exclude proposed ones – such as for energy trade in electricity and gas– i.e., they are “operational,” but nowhere near capacity. No one rides the bus from Delhi to Lahore, and flight schedules between those cities define the word “infrequent.”
Invoking GATT Article XXIV:11 might compel the two countries to start using these links.
So, as we “celebrate” the 70th anniversary of Independence, let’s do so mindful of what a U.S. President friendly to developing countries, John F. Kennedy, said on August 14, 1960: “We celebrate the past to awaken the future.”
Raj Bhala is Associate Dean for International and Comparative Law and Rice Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or the University, or Dentons or any of its clients, and do not constitute legal advice.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.