By Persis Khambatta & Ketan Thakkar

An Indian & a Pakistani soldier conclude a ceremony. Trade normalization may reduce tension between their countries. Source: Joshuahsong’s flickr photostream, used under a creative commons license.

Last week, Pakistan haltingly announced its intention to begin normalizing trade relations with India, ultimately granting India MFN status. This means that Pakistan’s tariffs on Indian imports would receive the same treatment as imports from its other trading partners. But what will it mean for India-Pakistan relations going forward?

Given that nothing in the past has worked to decrease tension on either side of the border, taking the heat off of politicians and putting it in the hands of economists and the private sector is a worthy effort.  Current bilateral trade is thought to be between $2 billion and $3 billion, most of it in three sectors—chemicals, base metals, and machinery and electronics—going through unofficial channels, mainly Dubai, costing both economies valuable revenue and increasing the price of goods on both sides of the border. Greater trade liberalization would reduce these costs, and begin to move the needle on trade volume upwards.

With an expected jump in trade, a simultaneous increase in people-to-people and private-sector interaction is logical. Increased commerce should be seen as a starting point for reducing tensions between the two countries and as a step in the right direction to help each country weather global economic forces. The move also seems to indicate that the countries are willing to separate economic issues from their more difficult political issues, which can only help move forward the formal dialogue they resumed this summer. These talks were suspended after the 2008 Mumbai terrorist attacks.

With Pakistan’s announcement of MFN status for India and pledges by Prime Ministers Manmohan Singh and Yousaf Gilani at last week’s South Asian Association for Regional Cooperation (SAARC) meeting to implement a liberalized visa regime, Pakistan clearly recognizes the benefits of being connected to the region’s largest economy. At an hour-long meeting on the sidelines of the SAARC summit, the prime ministers also agreed to move ahead with their obligations under the South Asian Free Trade Agreement (SAFTA) toward a Preferential Trade Agreement (PTA)—an ambitious goal, but another step in the right direction. The PTA would require that all tariffs on traded goods be zeroed out by 2016. The prime ministers also pledged to fast-track implementation of cross-border trade. There is always the chance that fundamental political differences can sidetrack the recent economic gestures, so while many experts and traders would cheer this recent announcement, cautious optimism is in order.

Persis Khambatta is a fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS Ketan Thakkar is an intern with the CSIS Wadhwani Chair. To read their CSIS Critical Questions on this topic click here.