Trying to pain our neighbour

It was a week of anger, grief and despair. Over 40 of our Central Reserve Police personnel had been killed by a suicide bomber. The government blamed our neighbour and promised retribution. In turn, Pakistan threatened retaliation. By mid-week, however, the financial markets seemed to believe no major hostilities would break out between the two countries.

To cool tempers and be seen as doing something immediately, the government withdrew Most Favoured Nation (MFN) treatment for Pakistan. And, imposed 200 per cent Customs duties on goods originating or exported from there, effectively making these too expensive to bring in. Considering the present volume of trade between the two countries, the move is unlikely to have much effect on overall import and export.  

The MFN provision, in Article I of the General Agreement on Tariffs and Trade (GATT) is a principle of non-discrimination. It obligates all World Trade Organization (WTO) signatories to treat all other member-countries equally as ‘most favoured’ trading partners.  India granted this status to Pakistan in 1996; the latter had not reciprocated fully. 

At present, India exports goods worth $1.9 billion a year to Pakistan and the latter exports goods worth $0.5 billion — just around two per cent of Pakistan’s total merchandise export in 2017. So, the move might somewhat assuage hurt feelings here but Pakistan is unlikely to feel pain.

Apparently, India can justify deviation from the MFN obligations under the national security exceptions clause in GATT. 

However, our import from Pakistan — fruits and nuts, plastering material, cement, cotton, leather — do not threaten national security in any way. Also, the notification (5/2029-Cus, dated February 16) imposing the 200 per cent duty on import from there was issued under Section 8A of the Customs Tariff Act. 

This section has no reference to national security. However, it empowers the government, through a notification, to direct an amendment of the First Schedule of the said Act to be made so as to provide for an increase in the import duty leviable on such article and to such extent as it thinks necessary. The only condition is that it should be satisfied that the duty should be increased and that circumstances exist to necessitate immediate action. 

Accordingly, the said notification 5/2019-Cus inserts a new tariff entry, 9806, for all goods originating in or exported from Pakistan, with a tariff rate of 200 per cent. This notification must be placed before Parliament in its next session for ratification. Meantime, the government has the right to rescind it but not modify the tariff rate.

The MFN treatment extended to Pakistan in 1996 was not withdrawn in the aftermath of several deadly terrorist attacks earlier – notably, the one on Parliament in 2001 and in Mumbai in 2008. Apparently, such a move was not contemplated at the time. Each situation is different and the government has now thought it appropriate to do so.

Last September, a World Bank study reckoned the annual trade potential between India and Pakistan at $37 billion. 

With the latest developments, most of that might remain unrealised. Some of it might get routed through third countries.

E-mail: tncrajagopalan@gmail.com