Insights into Editorial: Leave Pakistan’s MFN status intact
Insights into Editorial: Leave Pakistan’s MFN status intact
In the midst of rising tensions in the wake of the Uri attack, some in India are calling for the withdrawal by India of the most favoured nation (MFN) trade status for Pakistan.
What is Most Favoured Nation status?
Most Favoured Nation is a treatment accorded to a trade partner to ensure non-discriminatory trade between two countries vis-a-vis other trade partners. The importance of MFN is shown in the fact that it is the first clause in the General Agreement on Tariffs and Trade (GATT). Under WTO rules, a member country cannot discriminate between its trade partners. If a special status is granted to a trade partner, it must be extended to all members of the WTO.
Exceptions for MFN:
MFN at the same time allows some exemptions as well.
- One such exemption is the right to engage in Free Trade Agreements. This means members can participate in regional trade agreements or free trade agreements where there is discrimination between member countries and non member countries.
- Another exemption is that members can give developing countries special and differential treatment like greater market access. This special concession are in different forms like reduced tariff rates from developing country imports, concessions that allows developing countries to give subsidies to their production sectors etc.
- All these exceptions are subjected to strict conditions.
Have Pakistan and India accorded MFN status to each other?
The MFN status was accorded to Pakistan in 1996 as per India’s commitments as a WTO member. But Pakistan has not reciprocated, reportedly citing “non-tariff barriers” erected by India as well as huge trade imbalance. According to the WTO’s report on the Trade Policy Review of Pakistan (in 2015), “Pakistan is in the process of offering India Non-Discriminatory Market Access” (similar to MFN).
Why Pakistan is not extending MFN status to India?
India and Pakistan have great trade potentials. But trade among the two is not much because of political mistrust. Pakistan has been slow to take a positive decision on conferring the status to India.
- An important factor that makes it difficult for Pakistan to confer MFN status to India is the political impact of the tone of MFN status. It may feel that India is the most favored nation for Pakistan in literary sense though MFN means non-discrimination.
- To overcome that, Pakistan has devised a new term called Non Discriminatory Market Access (NDMA) which is equivalent to MFN. Such alteration of the MFN is happening elsewhere as well. For example in the US, the MFN is named as Permanent Normal Trade Relations (PNTR) clause. Pakistan has recently promised that it will confer India the NDMA status soon.
Does MFN mean preferential treatment?
In literal explanation, MFN doesn’t mean preferential treatment. Instead it means non-discriminatory trade that ensures that the country receiving MFN status will not be in a disadvantageous situation compared to the granter’s other trade partners. When a country receives MFN status, it is expected to raise trade barriers and decrease tariffs. It is also expected to open up the market to trade in more commodities and free flow of goods.
MFN essentially guarantees the most favourable trade conditions between two countries. These terms include the lowest possible trade tariffs, the least possible trade barriers and very crucial to trade relations– highest import quotas. The disclaimer only requires equal treatment to all Most Favoured Nations.
What are the pros of MFN?
- MFN status is extremely gainful to developing countries. The clear upsides are access to a wider market for trade goods, reduced cost of export items owing to highly reduced tariffs and trade barriers. These essentially lead to more competitive trade.
- MFN also cuts down bureaucratic hurdles and various kinds of tariffs are set at par for all imports. It then increases demands for the goods and giving a boost to the economy and export sector.
- It also heals the negative impact caused to the economy due to trade protectionism. This irks the domestic industry.
- A country that grants MFN on imports will have its imports provided by the most efficient supplier. This may not be the case if tariffs differ by country.
- Granting MFN has domestic benefits: having one set of tariffs for all countries simplifies the rules and makes them more transparent. It also lessens the frustrating problem of having to establish rules of origin to determine which country’s part of the product (that may contain parts from all over the world) must be attributed to for customs purpose.
- As MFN clause promotes non-discrimination among countries, they also tend to promote the objective of free trade in general.
What are the disadvantages of MFN?
The main disadvantage is that the country has to give the same treatment to all other trade partners who are members of the WTO. This translates into a price war and vulnerability of the domestic industry as a result. The country is not able to protect domestic industry from the cheaper imports and in this price war, some domestic players have to face heavy losses or growth restrictions.
What is the volume of trade between India and Pakistan?
Bilateral trade between India and Pakistan stands at $2.61 billion. The major commodities and goods in which both countries trade include cement, sugar, organic chemicals, cotton, man-made filaments, vegetables and certain fruits and tubers, mineral fuels, mineral oils, salts, earths, stone, lime, dry fruits, steel and plastering material.
What are India’s options?
India could consider making use of a ‘security exception’ clause — Article 21(b)(iii) — in the GATT to deny the MFN status to Pakistan or bring in certain trade restrictions.
Why this move would have little or no impact?
- First, there is simple economic logic. Free trade remains the best policy even if your trading partner wishes to be more closed. As economist Joan Robinson is supposed to have said, if your trading partner dumps rocks into their harbour to block entering cargo, you do not make yourself better off by dumping rocks in your own harbour.
- Second, trade with Pakistan accounts for less than 1% of India’s total trade, and the figures for Pakistan are not very much higher. Thus, even strategically, trade policy with respect to Pakistan today can neither be offered as a carrot nor wielded as a stick. Nor does it amount to much for India.
- Third, offering MFN status to a trading partner is an obligation, not a choice, for WTO members. The fact that Pakistan is not living up to its WTO obligations is not a good reason for India not to do so. Indeed, India would be perfectly within its rights to raise Pakistan’s non-compliance at the WTO.
- Finally, free trade fosters not just prosperity but also peace and friendship.
What will be the political fallout of such an action by India?
Though it will have only a “symbolic” impact in trade terms, politically it could result in India losing goodwill in the South Asian region, where it enjoys a trade surplus and is a party to a free trade pact called SAFTA, which also includes Pakistan. The move may also not go down well at the WTO-level.
Impact on Pakistan:
- The immediate impact could be very little, looking at the volume of trade between the two sides. However, India may opt to drag Pakistan to the WTO’s Dispute Settlement Body. This will allow New Delhi to remove trade benefits afforded to Islamabad under MFN status.
- Another step which India may consider is withdrawing concessions provided to Pakistan under provisions of the South Asian Free Trade Area (SAFTA) agreement. New Delhi can further ask members of the SAFTA to follow suit. And in the light of recent events, members of SAFTA are unlikely to stand against India’s move.
- Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka are the members of SAFTA which aims to increase the level of trade and economic cooperation among the SAARC nations by reducing the tariff and barriers.
- India has already made it clear that it will go all out to isolate Pakistan. And the latest decisions are part of India’s peaceful retaliation against Pakistan.
Why Pakistan should consider granting MFN status to India?
Granting MFN status to India may be beneficial for both countries. It may expand the size of the market because of trade creation and trade diversion. This possibly can help expand production on a large scale and also infuses competition into markets.
- India is a huge economy relative to Pakistan; opening up of trade between the two countries will expand the markets for both countries, stimulate investment both domestic and foreign, and thereby increase the growth rate of the economies of the respective countries. This in turn can create employment opportunities, increase income levels and lead to improvement in the standards of living in both the countries.
- Such “investment creation” can be partly offset by what might be called “investment diversion” when investments are diverted from the most rational location in the world to Pakistan and India. The MFN status can also benefit consumers, producers and workers in Pakistan because of more trade with India.
India can legitimately claim the moral high ground in fulfilling our WTO obligations while Pakistan does not. Revoking Pakistan’s MFN status would shred this advantage. It may offer revanchist satisfactions, but it would not reflect mature statesmanship.