Aug. 4 (Bloomberg) -- For 58 years India and Pakistan have traded accusations; now they're trading cattle.

Last week, the two nuclear-armed Asian neighbors reopened the Wagah border in Punjab -- the only road crossing between the two countries -- to trade after more than half a century.

The plan is to allow buffaloes, goats, garlic, onions, potatoes and tomatoes to be exported from India to Pakistan.

Separately, Pakistan this week ended a four-year ban on imports of Indian sugar, at least some of which will now be traded across the recently reopened border.

For the Indian government, resumption of border trade is a so- called confidence-building measure it says is needed before the two nations can resolve their dispute over Kashmir.

For Pakistan, allowing Indian agricultural products into the country means a better grip on soaring inflation. Indian exporters, especially sugar mills, view the move as an opportunity to get higher prices.

``Export of sugar from India to Pakistan is good for sugar mills, which are located in the northern parts of the country, as they will get a better price,'' says Arhant Jain, company secretary at New Delhi-based Dhampur Sugar Mills Ltd., India's second-largest producer by sales.

It isn't all smooth-sailing and bonhomie. After five decades of disuse, the Wagah crossing is ill-prepared for trade, especially of cattle. Unless proper warehouses and animal enclosures are set up, the border may turn into a dung heap, the British Broadcasting Corp. reported on Aug. 1.

Minor irritants like that shouldn't distract New Delhi and Islamabad from their bigger goal: boosting two-way trade so much that fighting a fourth war becomes commercially unpalatable for both the nations.

Most Favored Nation

India wants Pakistan to grant it ``most favored nation'' status, which normally entails the least onerous regimen of tariffs. Diplomatic considerations aside, Pakistan is concerned about the effect such a move may have on a trade balance that's already tilted in India's favor.

Both sides have a point.

MFN is a rather deceptive phrase in that it conveys the impression that granting it bestows certain privileges on one group of exporters that aren't available to others.

In reality, almost every country today is every other country's most favored nation for trade.

After the end of the Cold War, the MFN terminology started looking so silly that the U.S. replaced it in 1998 with ``normal trade relations,'' a status it accords most nations -- either permanently or through annual presidential extensions -- except to a handful such as North Korea and Cuba.

India granted MFN status to Pakistan in 2000. Pakistan allows imports of only 770 selected items from its neighbor.

Politics and Economics

Pakistan links India's demand for MFN to a resolution of the quarrel over Kashmir, the Himalayan region that's controlled in parts by India and Pakistan and claimed in full by both.

Pakistan's misgivings have as much to do with economics as politics. If it grants MFN to India, that country's exporters will be entitled, under the World Trade Organization's rules, to use Pakistani road links to reach Afghanistan and central Asia, says M. Abbas Raza, director of a management development center at the International Islamic University, Islamabad.

``Eventually the bulk of the goods will enter Pakistan as clandestine imports with zero rates of duty,'' Raza wrote in an April article in Pakistan's Nation newspaper.

Unbalanced Trade

Trade between India and Pakistan is both low and unbalanced.

In India's fiscal year ended March 31, 2005, imports from Pakistan, including cotton yarn, surged 65 percent to $95 million, or less than 0.1 percent of India's annual imports.

Even without MFN, India's exports to Pakistan, mostly minerals and chemicals, swelled 76 percent to $505 million in the year ended March, big enough to yield a $410 million trade surplus in India's favor.

Industry associations in India, such as the Federation of Indian Chambers of Commerce and Industry, or FICCI, say it's possible to increase annual two-way trade with Pakistan to $6 billion, from $600 million at present. Will that goal hold much appeal to Pakistan if India continues to export five times more to its neighbor than it imports?

``Negative trade balance isn't a deterrent for bilateral trade,'' FICCI said in a report on India-Pakistan commerce.

Trust Deficit

``Over the years there has been a negative trade balance for Pakistan in trading with Japan, Dubai and Germany, yet they continue to remain among top five trading partners,'' said the FICCI report entitled, ``Business beyond Borders.''

The crucial difference there is that Japan, the United Arab Emirates and Germany also figure among the top 10 private investors in Pakistan. Indian companies have so far been unwelcome to set up business in Pakistan.

That's slowly changing. Tata Consultancy Services Ltd., India's No. 1 computer software exporter, is seeking to open a training center in Lahore, Pakistan. If the experiment succeeds, a software code-writing center may follow, the Washington Post reported last month.

Dabur India Ltd., an Indian maker of herbal digestive medicines, has announced it wants to set up a factory in Pakistan, a market it serves through its unit in Dubai.

It's a modest beginning. Cross-border investment between India and Pakistan will remain limited to a few showcase projects until both countries have greater faith in each other.

Trade deficits may not matter; trust deficits surely do.

To contact the writer of this column: Andy Mukherjee in Singapore amukherjee@bloomberg.net.

Last Updated: August 3, 2005 16:42 EDT