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India at 72: Peace through trade across India’s borders

Raj Bhala
Tuesday, August 13, 2019

Seventy-two years after the British Partition of India on Aug. 15, 1947, India’s borders still delineate the economic concept of ‘opportunity cost’. At the places on its western, eastern, and northern frontiers where until Partition there were no lines, India chooses risk and excludes opportunity. To paraphrase the Old Testament Prophet, Isaiah (c. 700 B.C.), India’s borders are all swords and no ploughshares.

Through seven decades, India has ignored its borders for all but military purposes. That’s partly understandable, thanks to the conflicts in 1965, 1971, and 1999 with Pakistan. In all directions, in April-September 1965 and December 1971, Indian and Pakistani troops battled, as they did in May-July 1999 in Kashmir across the Line of Control. Safeguarding boundaries is an ineluctable national security choice. But the military is not the only weapon for border protection. 

Maybe it’s not even the best one.

Neutral counts indicate in these conflicts, India and Pakistan combined lost approximately 20,000 military personnel; as for civilians, estimates range from 300,000 to 3 million in 1971 in Bangladesh alone. The controversial changes on Aug. 5 to Articles 370 and 35A of the Constitution of India, removing the special, autonomous, status of Kashmir and bifurcating it into two Union Territories, Jammu & Kashmir, and Ladakh, may be calculated to bring peace. 

Nevertheless, today, nobody nowhere feels any safer. 

Indeed, Pakistan’s diplomatic moves against India on Aug. 7, and its anticipated actions at the United Nations, make everyone everywhere more apprehensive.

Might markets bolster security on both sides of a boundary? 

Suppose producers and consumers, exporters and importers could trade freely across their geopolitical demarcations, specifically those in these regions:

1. West across Gujarat, Rajasthan, and Indian Punjab, and Sindh and Pakistani Punjab, 
2. East across the Indian states of Bengal, Assam, Meghalaya, Tripura and Mizoram, and Bangladesh’s divisions of Khulna, Rajshahi, Rangpur, Mymensingh, Sylhet, and Chittagong, and 
3. North across the LoC.

Might their mutually beneficial exchanges cross-border, appropriately monitored to avoid illicit trafficking, dispel their mutual cross-border suspicions, helping them transform some of their swords into ploughshares? 

That’s the opportunity cost question. In seeing its borders through army goggles, India misses the most valuable alternative view of its borders, namely, to create Qualified Industrial Zones at them. 

Enhancing peace through trade is not a new conflict-mitigation idea. In their 1945-47 preparatory conferences, the drafters of the General Agreement on Tariffs and Trade wrote it into GATT Article XXIV:11. That’s a special rule for a commercial association between India and Pakistan that does not meet all of legal criteria in the rest of that Article for a free trade agreement or customs union. The drafters foresaw the Partition, and gave these two founding GATT contracting parties the opportunity for continuity, that is, to continue the cross-border trade after Partition that they enjoyed before the British quit.

Even before GATT, in the mid-1930s, America’s longest-serving Secretary of State, Cordell Hull, championed enhancing peace through economic interdependence over strengthening the fortresses of colonial preference schemes that characterised the late 19th and early 20th centuries. The evil Tripartite Pact got in the way. And, long before GATT, medieval Christian theologians and Ancient Greek and Roman philosophers debated doctrines like the universal economy and openness versus autarky, inquiring whether familiarity with other peoples, faiths, and tongues through trade might cultivate comprehension rather than contempt.

Four Laws To Operationalise QIZs 
Starting with Qualified Industrial Zones, maybe the prophecy in Isaiah 2:4 – that nations “shall beat their swords into ploughshares, and their spears into pruning hoods: national shall not lift up sword against nation, neither shall they learn war any more” – could come true on the Subcontinent.

Whether QIZs promote peace depends on vital legal details. Lessons must be learned from American-backed QIZs in another conflict-ridden part of the globe the British also partitioned in 1947, namely, the Levant. An August 2013 Congressional Research Service Report chronicles some lessons: In 1996, the U.S. Congress amended the Israel-U.S. Free Trade Agreement to allow for duty-free, quota-free access for goods from QIZs between Israel and Egypt and Israel and Jordan. The vision was prophetic: “to expand regional efforts to promote peace, democratic transitions, and economic development in the larger Middle East region through trade and investment.”

For the prophecy to be fulfilled, first, production in QIZs must be collaborative. If entrepreneurs and workers predominate from one country, then no creative, shared space exists. Think also of certifying the employers and employees as Indian and Pakistani. 

Parachuting in American or Chinese factors of production defeats the purpose of building indigenous human capital and mutual respect. 

Moreover, local workers themselves must see their wallets fatter. If wages are not paid directly to them, but rather deposited in accounts government officials control, then those officials can divert those wages for self-interested purposes. QIZ paychecks are not for fanatical right-wing Hindu pujas, nor for Islamist extremist namaz, and not one rupee is to fund a rocket. Wage diversion allegedly occurred in the Kaesong Industrial Complex, a special area between North and South Korea, 10 kilometers north of the De-Militarized Zone. Wages were paid into North Korean government accounts, and flowed to weaponry and luxury items. North Korean workers got scraps. Protesting the North’s repeated military provocations, the South temporarily shuttered Kaesong in February 2016. It’s still closed.

Second, origin matters as to what the Indo-Pakistani and Indo-Bangla manager-worker teams make. The merchandise they export must be produced inside the QIZ, which means a strict rule of origin is needed, compliance with which is evidenced by a verifiable certificate of origin.

One ROO is a value-added test, for instance, at least 50 percent of the value of merchandise must come from inputs and operations within the QIZ to qualify for the origin label ‘Made in the QIZ’. 

That 50 percent restriction prevents goods manufactured in, say, China, from being trans-shipped through the QIZ, or components made in China and merely assembled in the QIZ, from qualifying as originating goods. 

But, a strict ROO shouldn’t constrict. It should allow the joint teams to source up to half of their inputs, and engage in up to half of their operations, outside the QIZ. They’ll need that flexibility when the QIZ opens, because they won’t have all the ingredients to produce finished merchandise at their disposal in their immediate vicinity. As their border areas flourish thanks to the QIZ, they’ll find more inputs locally, and have the option to up the ROO percentage.

Third, two ROO corollaries about inputs are needed. In an Indo-Pakistani QIZ in the west and at the LoC, and likewise for an Indo-Bangladeshi one in the east, of the 50 percent originating materials, how much can come from India versus its neighbour? The easier answer is 25 percent from each country. That may not be practical for all merchandise. It might work for cotton textile and apparel articles, with 25 percent Indian and 25 percent Pakistani cotton, but not for silk-based garments, where India holds the comparative advantage in that fiber. And, of the 50 percent non-originating inputs, how much can come from benefactor countries, such as Australia, Canada, the EU, Japan, Korea, and the U.S.? Is a reservation for up to 25 percent American cotton or 25 percent Japanese silk allowable? Indo-Pakistani trade lawyers need to collaborate to find reasonable conclusions, balancing the competitive cost needs of their joint teams in the QIZ against possibly mercantilist demands from non-QIZ suppliers.

Fourth, sponsor and benefactor countries must grant duty-free-quota-free treatment for all QIZ merchandise. As sponsors, India, Pakistan, and Bangladesh must give better-than-Most-Favored-Nation treatment, namely, duty-free-quota-free preferences, at least to goods in their respective QIZs, and possibly to all QIZs they support. Benefactor countries, the major developed nations, must do so, too. They are big markets that, if tapped, will allow growth in Subcontinental QIZs’ output and employment and, in turn, incentivise QIZ managers and workers to preserve their borderless zone rather than reinforce and booby trap old borders.

The Ironic Fifth Law And Help From America 
Ironically, the fifth legal detail is to draw boundaries. What delineates a QIZ across the Indo-Pakistani and Indo-Bangladeshi border? A bigger QIZ is better for sourcing inputs and spreading development. A smaller QIZ is preferable to police.

Turning swords into QIZ ploughshares is most difficult when international boundaries are unsettled, as at the LoC. 

A QIZ at Punjab’s Wagah, or Assam’s Dhubri, is less controversial than a Kashmiri QIZ.

Sadly, when Pakistan’s Prime Minister, Imran Khan, visited the White House on July 22, 2019, he didn’t knock down even one of these wickets. 

Pakistan’s cricket legend rightly told President Donald Trump there is no military solution in Afghanistan. The reality TV star said he (yes, Donald) could defeat the Taliban in 10 days, but didn’t want to kill millions of people. (Applause!) Maybe the Prime Minister didn’t want to bowl a googly to his host, who, in early 2019, cut aid to Khan’s team because of its “lies and deceit.” Maybe the Pakistani’s bat wasn’t fast enough to propose QIZs to enrich Pakistan and help it stabilise Afghanistan, which remains America’s, 18-year old, $45 billion-per-year sticky wicket defended by 14,000 U.S. players.

So, the U.S. President offered to mediate between Pakistan and India over Kashmir: “If I can help, I would love to be a mediator…. If I can do anything on that let me know.” That statement was—to change metaphors from the Subcontinent’s to America’s pastime—a ‘hanging curve’ for the Prime Minister to knock out of the baseball park. Instead, Mr. Khan was ‘caught looking’. He should have swung for the fences: “Yes, you can do something: help us build us our field of dreams, a QIZ; if you do, they – entrepreneurs, producers, importers, and exporters – will come.” Pakistan’s Captain should have put America’s Captain to the test.

Better yet, Khan should play in tandem with India’s Captain, Narendra Modi. They can call upon the U.S. President to promote American foreign direct investment into their hoped-for QIZs, back the FDI with Overseas Private Investment Corporation financing, and grant duty-free-quota-free treatment — notwithstanding America’s June 2019 withdrawal of India’s Generalized System of Preferences benefits — for QIZ-origin merchandise. India’s Captain needn’t repeat his denial he didn’t ask Captain Trump to mediate the Kashmir conflict; the request is for greenbacks, not good offices.

The Indo-Pakistani co-captains can point out the U.S. is the third and fourth major FDI source for Pakistan and India, respectively, and first- and second-largest export markets for Pakistani and Indian merchandise, respectively. Why not re-draw the boundary line to include goods with an origin label bearing ‘Made in an Indo-Pakistani QIZ’? And, they can play the opposition: if America doesn’t help, maybe China might.

Raj Bhala is the inaugural Brenneisen Distinguished Professor at the University of Kansas School of Law, and a 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 University, or Dentons or any of its clients, and do not constitute legal advice.

Faculty name: 
Raj Bhala