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.
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.
When did India grant MFN status to Pakistan?
India granted MFN status to Pakistan in 1996, a year after the formation of WTO.
Pakistan still hasn’t granted India with MFN status. On the other hand, it came up with a dissimilar but globally popular Non-Discriminatory Market Access (NDMA) agreement.
The reason Pakistan has chosen to adopt the NDMA with India is due to political mistrust and a history of border conflicts.
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.
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
- Lowest possible trade tariffs
- The least possible trade barriers
- Highest import quotas.
The WTO rules allow discrimination in certain cases like in cases when a country signs free trade agreements in a region. In that situation, a country may grant special favours and trade concessions to a country as compared to non-member countries of that group.
What are the pros of MFN?
MFN status is extremely gainful to developing countries.
It provides 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.
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.
Consequence of India Withdrawing MFN to Pakistan
India’s decision to impose a 200% customs duty on all Pakistani goods will lead to a significant drop in Pakistani imports to India. However, given the low trade volume, it will not have any noticeable impact on Pakistan.
There is a high possibility that this would increase the share of informal trade (trade routed through third countries like UAE and Singapore) between India and Pakistan, which currently is estimated to be at $4.71 billion – almost double the formal trade.
Retaliatory tariffs by Pakistan will jeopardise Indian exports worth close to $2 billion, thus harming India.
Legal Tenability: Article XXI (b) of GATT allows a WTO member country to take any action that ‘it considers necessary’ for the protection of its essential security interests. But it requires a reasonable explanation as to why and how increasing customs duty to 200 percent on Pakistani products is ‘necessary’ to protect Indian security intersts.
For bilateral and SAARC regional trade to blossom, a congenial atmosphere has to be created. It is difficult to talk of trade when suicide bombers are killing Indian soldiers. Therefore, Pakistan has to act decisively and ensure that its soil is not used for terrorism against India.