Just a day after at least 40 Central Reserve Police Force (CRPF) personnel lost their lives in a dastardly suicide bombing attack in Pulwama (Jammu Kashmir), the Indian government has withdrawn “Most Favoured Nation” or MFN status accorded to Pakistan.
India’s Finance Minister Arun Jaitley said the Ministry of External Affairs will initiate all possible steps to ensure complete isolation from the international community of Pakistan, which is expected to have a hand in the attack carried out by terror outfit Jaish – e- Mohammed.
Most Favoured Nation status is given to an international trade partner to ensure non discriminatory trade between all partner countries of the WTO.
A country which provides MFN status to another country has to provide concessions, privileges, and immunity in trade agreements. It is the first clause in the General Agreement on Tariffs and Trade (GATT).
Under rules of the World Trade Organisation (WTO), a member country is not allowed to discriminate between trade partners and if a special status is granted to one trade partner, the country is required to extend it to all members of the WTO.
MFN is a non discriminatory trade policy as it ensures equal trading among all WTO member nations rather than exclusive trading privileges. Since India and Pakistan are part of the WTO, both are required to grant MFN status to each other and other partner countries.
MFN status helps reduce trade barriers and results in a reduction in tariffs. An MFN status helps in the promotion of free trade between two or more countries.
The commerce ministry will now write to WTO in order to revoke MFN status given to Pakistan by invoking Article 21 of WTO also known as the Security Exceptions Article.
The process of communicating to WTO has begun. As of now, the value of trade between India and Pakistan stands at 2.61 billion dollars or Rs 1.86 lakh crore.
The decision was taken at the CCS meeting chaired by Prime Minister Narendra Modi.
Article 1 of General Agreement on Tariffs and Trade (GATT) 1994, requires every WTO member country to accord MFN status (or preferential trade terms with respect to tariffs and trade barriers) to all other member countries.
The WTO is the only global international organization dealing with the rules of trade between nations and the 164 member countries of the WTO represent 98 per cent of world trade. Only a handful of very small countries are out of the WTO.
Every WTO member is supposed to be“most favoured” for all other WTO members.
India granted MFN status to Pakistan in 1996, just a year after the formation of the WTO. However, Pakistan has not done so.
The decision by India to withdraw MFN status to Pakistan is intended to isolate Pakistan diplomatically and squeeze the country’s industry. Even though the low volumes of trade limit the impact that such a step can have, the stoppage of input materials such as chemicals and cotton from India will push up costs of production for the relevant Pakistani industries.
Till 2011, Pakistan allowed only 1946 items to be imported from India. All other items were prohibited. After 2011, Pakistan moved from a ‘positive list’ to a ‘negative list’ approach where it permitted all imports from India barring 1,209 items that remained on the banned list. While this was a step forward in normalizing trade relations, it still fell short of fully honoring MFN obligation towards India because Pakistan does not impose such restriction on imports from other countries.
The withdrawal of MFN status is going to hurt Pakistan to some extent. Withdrawal of this status means India can now enhance customs duties to any level on goods coming from Pakistan. India imports fruits, cement, leather, chemicals and spices from Pakistan.
According to a World Bank report, the current level of trade between Pakistan and India is valued at a little over $2 billion, while the capacity is as high as $37 billion.
Pakistan cannot do much since it never offered India MFN status despite promises. It has already blocked import of many items from India. The preferential access granted by Pakistan on 82.1 percent of tariff lines under SAFTA is partially blocked in the case of India because Pakistan maintains a negative list comprising 1209 items that cannot be imported from India. However, in practice, many of these items are exported from India to Pakistan through a third country, usually the United Arab Emirates. Pakistan allows only 138 items to be imported from India over the Atari – Wagah land route. Cargo trucks from either side cannot move beyond their border zones, which mean that goods must be trans-loaded at the border, adding to the time and cost of trading and thus discouraging expansion of trade. India mainly exports cotton, dyes, chemicals, vegetables and iron and steel to Pakistan.