New Delhi, Nov4 () :Pakistan gives India MFN status, the entrepot trade that was going from Bombay to Dubai to Karachi will go (directly from) Bombay to Karachi. This is bad news for Dubai and for individuals and firms which are invested in the future of Dubai as an entrepot centre. Trade data should show a fairly sharp decline in India’s exports to UAE and a fairly sharp rise in India’s exports to Pakistan predicts trade analyst Ajay Shah.
He adds -There will be a boom in shipping, communication and trade serving the direct Bombay-Karachi route. Similarly, the ports of Gujarat will do a lot of business directly to Karachi.
At first blush, little changes: the goods that used to go via Dubai would now go directly to Karachi. But a recurring theme in economics is the extent to which apparently small frictions loom large. The removal of fairly modest frictions matters a lot for business activity. So when the cost of shipping goes down by roughly 3x, even though the cost of shipping may be small in absolute terms, this would have a big impact on trade. Another dimension of cost is the cost of the middleman in Dubai. The establishment cost of this middleman in Dubai would be eliminated.
Important dynamics will now set in amidst firms in Pakistan. Firms that compete with exports from India will suffer. Firms that consume imported inputs from India will thrive. Creative destruction will take place; resources will shift from one group of firms to another. Exporters will be better able to export to India, both because of access to cheaper labor and capital that’s freed up by firms that die owing to import competition.