 "PM Narendra Modi with Home Minister Rajnath Singh at a High Level Meeting in the wake of Uri terror attack. Photo: PTI")
It was revealed on Tuesday that the government is looking to reassess the Most Favoured Nation (MFN) status accorded to neighbouring Pakistan. Prime Minister Narendra Modi has called a meeting of top officials from Commerce and External Affairs Ministries on Thursday to discuss ways to counter Pakistan through an economic offencive.
Earlier in September, an attack by militants allegedly trained and supported by Pakistan had killed 18 Indian soldiers. While nothing has been decided so far, differences of opinion as to the requirement and efficacy has already risen among top officials.
What is MFN ?
The MFN status is governed by the ’s (WTO) General Agreement on Tariffs and Trade (GATT). Countries signatory to the agreement commit against discriminating each other and rest of the WTO member countries. This implies that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods/ services from all its trading partners. Thus all nations accorded the MFN status are ‘most favoured’ and stand equal chances of boosting trade with a country as compared to all its competitors.
While India has given the status to Pakistan back in 1996, it has not reciprocated by doing the same till date. This means Indian exports to Pakistan face unfavourable odds as compared to other nations although Pakistani exports to India face the same treatment as other nations.
How much does India and Pakistan trade?
Inspite of sharing relatively similar cultural preferences and having millions of consumers, trade between the neighbours is very little, standing at $ 2.61 billion or just 0.41 per cent of India’s overall merchandise trade in 2015-16.
This is mostly because of the environment of political animosity between the nations as trade has the potential to grow manifold, trade experts say. Trade rose by more than 10 % in 2015-16.
What happens if MFN is removed ?
While theoretically trade will continue with little repercussions, India may then impose additional tariff duties on imports from Pakistan, which it will be free to do then. However, since goods worth only $ 441 million, or 0.12 per cent, of the total inward shipments is imported from Pakistan, the government might not take such a step.
Pakistan may also raise tariffs on imports from India but it is free to do so even now. Exports to Pakistan is $ 2.17 billion, or 0.83 per cent of the total Indian outward shipments. Also, Pakistan already restricts access to Indian exports across 1029 products covering textile, auto and agro products while Indian has no such measures in place.
So why not go ahead and do it ?
Globally, countries tend not to revoke the MFN in cases apart from economic hostility by a trade partner. Senior officials in the Commerce Ministry have expressed concerns that the move may be difficult to explain in a multilateral trade forum as India cannot complain of harmful trade practises by Pakistan in recent times.
It may also harm India’s position in multilateral trade forums. Pakistan also has the choice to cite ‘security exceptions’ in Article XXI of GATT, under which a member-country may not grant MFN to another member on grounds of security as an excuse for withholding MFN status to India.
Since being established, the MFN clause has been upheld by the WTO as it has worked as a bulwark against dubious, partial trade practises by countries and promoted free trade under a framework of mutual openness. The body strongly suggests against revoking it.
What other ways can India engage ?
The government is reportedly mulling the option of dragging Pakistan to the dispute settlement body of the WTO apart from withdrawal of the concessions given to Pakistan under the South Asian Free Trade Area (SAPTA) agreement.
