Less than 24 hours after the terror attack in Jammu and Kashmir’s Pulwama district, India withdrew the Most Favoured Nation (MNF) status accorded to Pakistan. While the withdrawal of the MFN status by India is negative in sentiment terms for the bilateral relations, the impact on trade is unlikely to be substantial given that volumes of merchandise trade are low.
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In fact, India continues to maintain a substantial trade surplus, despite the fact that Pakistan is yet to transition fully to MFN status for India. Pakistan's exports to India have consistently been about a fourth of what it imports from India, the MFN concessions notwithstanding.
What is Most Favoured Nation status?
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.
Accordingly, India accorded MFN status to all WTO member countries, including Pakistan, from the date of entry into force of the so called Marrakesh Agreement, establishing the WTO. The WTO is the only global international organisation 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.
The primary purpose of the WTO is to open trade for the benefit of all. In that sense, "most favoured" sounds like a contradiction. But even though it suggests special treatment, in the WTO it actually means non-discrimination - that is treating virtually everyone equally. In effect, then, every WTO member is supposed to be"most favoured" for all other WTO members.
In accordance with the MFN principle and its obligations under the WTO, India accorded Pakistan MFN status in 1996. However, Pakistan is yet to transition fully to MFN status for India and it maintains a Negative List of 1,209 products that are not allowed to be imported from India. In addition, Pakistan permits only 138 products to be imported from India through Wagah/Attari border land route.
Despite these restrictions, India continues to maintain a substantial trade surplus with Pakistan.
Controversy over reciprocal status for India
On November 2, 2011, the Pakistani cabinet decided formally to accord India MFN status. But that decision remains unimplemented. In March 2012, Pakistan substituted a "Positive List" of a more than 1,950 tariff lines permitted for import from India, by a "Negative List" of 1,209 lines that could not be imported. This meant that the default setting had moved from 'no import' to 'import', and instead of listing only items that could be bought from India, Pakistan had listed items that could not be bought, with everything else allowed. But this was still not the same as according India MFN status.
This intransigence has periodically triggered anger in India, and demands have been raised, especially during times of heightened tensions and terrorist attacks sponsored by Pakistan, to withdraw the MFN status that New Delhi has granted to Islamabad. India had not, however, taken that step so far.
Despite the bilateral ups and downs, the MFN status accorded by India was not touched. As late as December 19, 2018, in response to a query in Rajya Sabha on the withdrawal of MFN status to Pakistan, the junior Commerce and Industry Minister had told Rajya Sabha in a written reply: "No decision has been taken to review the MFN status accorded to Pakistan, so far.."
India's trade numbers with Pakistan are minuscule. Trade between the neighbours jumped nearly three-and-a-half times between 2000-01 and 2005-06 (from $251 million to $869 million per annum), but progress was slower in the decade that followed, with volumes rising a little over three times. India's trade with much smaller Bhutan is over half that with Pakistan (In 2016, total India-Bhutan bilateral trade was Rs 8,723 crore; with Pakistan, it was around Rs 17,200 crore.) Back in 2007, the Indian Council of Research on International Economic Relations (Icrier) had projected a bilateral trade potential of $11.7 billion (Rs 46,098 crore), if both neighbours took proactive measures to exploit untapped areas of economic cooperation. But in FY17, India-Pakistan trade was a mere $2.29 billion, or about 0.35% of India's overall trade.
In the 7th round of Commerce Secretary level talks with Pakistan, held in September 2012 in Islamabad, a roadmap was agreed for facilitating trade, identifying several actions to be taken by both the countries in a time-bound manner. The agreed roadmap could not be implemented since Pakistan did not notify the removal of trade restrictions through Wagah-Attari land route (which was the first step identified in the roadmap). The Commerce Ministers of India and Pakistan met in January 2014 on the sidelines of the 5th SAARC Business Leaders Conclave held at New Delhi. Then in the meeting between Prime Ministers of India and Pakistan on 27th May 2014, India stated that the two countries could move immediately towards full trade normalisation on the basis of September 2012 roadmap worked out between the Commerce Secretaries of both countries. No bilateral trade meeting between India and Pakistan has taken place since then.
Pakistan's Prime Minister Imran Khan has repeatedly spoken of improving trade with India, arguing that "the best way to alleviate poverty and uplift the people of the subcontinent is to resolve our differences through dialogue and start trading".
Move to withdraw the MNF status
Union Finance Minister Arun Jaitley in his first day of resuming office addressed the press following a Cabinet Committee on Securities meeting Friday saying that the MFN status to Pakistan stands withdrawn.
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. It would also give a push to the illegal trade between the two countries, which takes place through border gaps and via third countries. It could also give a handle to extremist elements in Pakistan to scale up the rhetoric against India.