India’s reported decision to revoke Pakistan’s most favoured nation (MFN) status hot on the heels of the Pulwama attack has come as a surprise. For one thing, the move upends New Delhi’s erstwhile stance of keeping security and commercial issues apart in Indo-Pak relations. For another, contrary to Indian expectations, the move is not likely to put Pakistan through the hoop, as India accounts for only a fraction of the latter’s export revenue.
The MFN is a constitutional principle of the multilateral trading system put in place by the World Trade Organization (WTO). Article I of the General Agreement on Tariffs and Trade (GATT), which forms part of the WTO body of agreements, states: “With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation…any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.”
The aforementioned text brings out three salient features of the MFN principle: Contrary to its denotative meaning, the MFN status doesn’t confer any special trading rights or privileges. Rather, the MFN treatment simply means non-discrimination among trading partners. That’s why in the US and the EU, the MFN treatment is also referred to as the normal or third-country trading status.
The MFN principle has a very wide scope. It applies to both tariff and non-tariff measures (NTMs) – such as quantitative restrictions – and the manner in which such measures as well as the rules and regulations governing import and export trade are invoked. The MFN treatment is also supposed to be immediate and unconditional. ‘Immediate’ means that as soon as a country joins the WTO, its obligation to treat all its trading partners equally starts. ‘Unconditional’ signifies that the MFN treatment given to a country is not contingent upon its having fulfilled all its treaty obligations.
At the time of the birth of Pakistan, India was its largest trading partner. In 1948 when GATT, the WTO’s predecessor, came into being, both Pakistan and India became its members and granted each other MFN status. However, the bilateral trade relations were disrupted by the 1965 war and remained suspended till 1973. When trade was resumed, the MFN principle was set aside by both countries and the trade was conducted on the basis of ‘Positive Lists’. The Positive-List approach meant that only those products could be traded between the two nations which were on the respective lists.
In 1995, the WTO was born and adopted the MFN as its constitutional principle. Accordingly, India restored Pakistan’s MFN status, meaning that imports from Pakistan, like any other WTO member, were allowed without any discrimination. Pakistan, however, retained the Positive List – thus restricting imports from India.
The Positive List was gradually expanded. In 2011, as part of the efforts to liberalise trade with India, Pakistan replaced the Positive List with a Negative List, which meant that only products on the new list could not be imported; the rest were importable. At present, the Negative List comprises some 1200 products. On all the products which are importable from India, Pakistan applies the MFN or third-country tariffs. Thus, the denial of MFN status to India entails a ban on the import of a few hundred products. Pakistan and India are also members of the South Asian Free Trade Agreement (Safta) and accord each other preferential treatment.
At the same time, Pakistani exporters maintain that stringent NTMs – such as cumbersome product certification and customs clearance procedures, restrictive trade routes, and visa issues – dial down their access to the enormous Indian market. These NTMs vitiate the MFN market access for Pakistan’s exports in India and are one of the reasons for Pakistan’s abysmally low share in India’s world imports.
Despite the MFN issue, bilateral trade has heavily and consistently been in favour of India. In 2017, India ran $1.36 billion trade surplus with Pakistan ($1.69 billion Indian exports and $334.75 million Pakistan exports). India accounts for 3.3 percent of Pakistan’s global trade, 1.69 percent of its global exports, and 4.23 percent of its Pakistan’s global imports. At the same time, Pakistan accounts for less than one percent of India’s world trade. The data suggests that a further disruption in bilateral trade will hit India much harder than Pakistan.
Pakistan has historically linked normalisation of economic and commercial relations with India, including grant of the MFN status, to that of political relations, in particular the resolution of the long-standing Kashmir dispute. Ironically, the major reason New Delhi didn’t challenge Islamabad’s decision to withhold the MFN status in the WTO was also the Kashmir question. A challenge to the MFN status would invariably bring the Kashmir problem to a multilateral forum, which runs counter to the Indian position that the issue may only be discussed bilaterally.
India, on the other hand, has, until recently, consistently maintained that bilateral economic relations should not be held hostage to the political tensions between the two countries. A related argument was that restoration of normal economic relations between the two countries would create common stakes, which in turn would contribute to addressing the political issues. India followed this approach in its relations with China with both countries having realised that letting political issues bottleneck enhanced bilateral economic cooperation will be to the detriment of each.
In principle, New Delhi was on a firmer ground. The MFN treatment is the principal obligation created by the multilateral trading system. It can’t be withheld for political or security reasons. Examples also abound of countries – China and Taiwan, India and China, the US and the former USSR – having normal trading relations notwithstanding political tensions between them.
The Pak-India composite dialogue, which kicked off in 2004, was an attempt to sort out the outstanding, including commercial, issues between the two countries. The process, however, came to a standstill in the wake of the 2008 Mumbai attacks, which India set down to ‘non-state actors’ from Pakistan.
Since the Mumbai attacks, India has regarded stepped up action by Pakistan against militants allegedly based inside the latter’s territory – particularly the alleged perpetrators of the Mumbai act of terrorism – as the key to the revival of relations with its western neighbour. New Delhi has also been pressing Islamabad to extradite the alleged masterminds of the Mumbai carnage. Islamabad hasn’t obliged, partly because it has no extradition treaty with New Delhi and partly because the evidence shared with it isn’t conclusive.
Since the MFN principle has a very wide scope, its withdrawal may take several forms. India may levy higher tariffs on imports from Pakistan. It may restrict trade with Pakistan by setting up a positive or negative list. It may subject Pakistani imports to more stringent NTMs, which are too difficult to comply with. Already, Indians have stopped purchasing Pakistan’s cement. Pakistan may retaliate by adopting similar measures. Since Pakistan’s major imports from India comprise raw cotton, yarn, chemicals, metals, and vegetables, the cost of production for manufacturers and the consumer prices may go up.
By withdrawing Islamabad’s MFN status, New Delhi has embraced the former’s stance that commercial and political (or security) issues can’t be segregated. More than anything else, it’s the upcoming national elections that made the Modi government embark on such a course despite the fact that the more the two countries trade, the greater benefits India draws.
The writer is an Islamabad-based columnist.