7 PM | India withdraws Pakistan’s MFN status | 21 February, 2019

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Context

After the terror attack in Pulwama, India withdrew the Most Favoured Nation (MNF) status accorded to Pakistan.

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.
• India granted MFN status to Pakistan in 1996, just a year after the formation of the WTO. On the other hand, Pakistan is yet to award MFN status to India. The reason behind Pakistan’s move to not grant MFN status to India is decades of conflict, mistrust, and war.
• Pakistan maintains a Negative List of 1,209 products that are not allowed to be imported from India. Despite these restrictions, India continues to maintain a substantial trade surplus with Pakistan.

Trade between India and Pakistan

• Trade between India and Pakistan is done mainly through three routes

a) The official route

b) The illegal (informal) route: It is through smuggling along porous India-Pakistan land borders and also Afghanistan, which may not be accounted for in the national income

c) Through free ports of Dubai and Singapore: A large volume of trade between two countries is done mainly through Dubai and Singapore, which have free ports and accommodate legal agents of traders from India and Pakistan

• From 2011-12 to 2017-18, India’s formal trade with Pakistan increased from $1.94 billion to $2.41 billion.
• Imports from Pakistan grew at a lower rate (1.04%) compared to exports (1.32%) per annum from 2011-12 to 2017-18.
• Major exports from India is cotton, p-Xylene, polypropylene and single yarn while major exports to India are dates, Portland cement, other petroleum oil and light oils.
• Pakistan imposes a large number of Non-tariff barrier on Indian exports, the major ones being export related measures, technical barriers to trade and sanitary and phytosanitary measures.
• In 2012-13, informal trade between India and Pakistan, estimated in a study, was $4.71 billion, which was double when compared to formal trade. India’s informal export share to Pakistan was again much higher at $4 billion while its import share was low at $0.71 billion.
• Despite of bilateral ups and downs, the MFN status accorded by India was not touched earlier. In the aftermath of the Uri terrorist attack in 2016, India considered revoking Pakistan’s MFN status and withdrawing concessions given under the South Asian Free Trade (SAPTA) agreement. However, government ultimately decided not to take any trade-related countermeasures.

Impact of withdrawal of status of MFN

India’s decision to impose a 200% customs duty on all Pakistani goods will lead to a significant drop in Pakistani imports to India. However, given the low trade volume, it will not have any noticeable impact on Pakistan. Some of the other impacts are:

1. Pakistan economy: According to ASSOCHAM much of India’s imports from Pakistan are raw materials while India’s exports are finished products. If India restrict trade with pakistan, it would hurt Pakistan badly.
2. Informal trade may increase: Informal trade may increase due to restrictions which would ultimately impact the India’s interest more.
3. Retaliatory tariffs on Indian goods: Pakistan may impose retaliatory tariffs on Indian goods and/or expands its negative list prohibiting imports from India. Such retaliatory tariffs will jeopardise Indian exports worth close to $2 billion
4. Impact on regional atmosphere: This would impact intra-SAARC trade. Pakistan may look for new markets beyond SAFTA.
5. Violates the WTO principle: India has to justify deviation from the MFN obligation. Although in the current scenario, India would make a case under the national security exception given in Article XXI of GATT. Last year, US announced a hike in steel and aluminium tariff rates citing national security.

Pakistan had used the provision of Article XXI to extend the MFN status to India. India has not taken the issue to the WTO dispute settlement mechanism, partly because it is difficult to challenge Pakistan’s subjective assessment on security issues.

Way Ahead

It is reported that Pakistan based terrorist organisation JeM allegedly has direct involvement in Pulwama terror attack. Thus, India’s move to revoke MFN status can be justified on the ground of national security. India should also look for another punitive measure both diplomatically and economically (such as blacklisting of Pakistan at FATF meeting) to compel Pakistan to stop terror outfit growing on their land.

India should adopt functionalist approach to deepen trade ties with Pakistan as part of a long term solution in bringing peace in South Asia. Deeper economic integration through trade will create vociferous constituencies that would demand and lobby for peace as it would serve their interests.

Source: https://www.thehindu.com/todays-paper/tp-opinion/more-symbolic-than-punitive/article26325901.ece