Story Of The Week

India revokes MFN status to Pakistan: Implications and Aftermath

“Terrorism is a significant threat to Peace and Security, Prosperity and People.”

Ban Ki-Moon

 

On February 15, a day after the horrific suicide bombing attack in Pulwama, that took lives of at least 40 brave CRPF personnel, the Union Government of India decided to revoke the “Most Favored Nation” status accorded to its neighboring country in 1996, after the formation of the World Trade Organization (WTO).

Pakistan is once again into denial mode despite Jaish-e-Mohammed, a Pakistan based militant group, coming out and taking the responsibility for the attack just after few hours of the happening of it. Although being banned in 2002 by the Pakistan government, this militant group still operates freely in the country, as per various US security agencies. With Indian government thinking upon every possible move to respond strongly to Pakistan after the cowardly attack, launching an outright campaign to phase out the cruelties of the neighbor by revoking Pakistan’s MFN status is well within India’s rights.

India has considered withdrawing MFN status accorded to Pakistan twice before – after similar kind of attacks in Uri and Pathankot, but now India is contemplating upon taking more stringent measures involving suspension of trade ties entirely with its hostile neighbor.

However, there are a few questions which need to be answered first to understand this matter entirely. What does the MFN status mean? Why did India grant MFN status at first place, when Pakistan is known for long for sponsoring terror activities on its soil against India? Why did not India revoke MFN status earlier? What are the implications of removing MFN status now? How will Pakistan respond to this?

 

What is the Most Favored Nation?

As per the Most Favored Nation clause of General Agreement on Tariffs and Trade (GATT) of WTO, a member country or a signatory to GATT, require providing any concessions, privileges, immunity granted in a trade agreement to one country, to all other member countries. By name, most favored nation status may imply differently but its status denotes equal treatment of all WTO member countries. It is a method of increasing trade and establishing equality among all member countries rather than favoring one nation over others.  A WTO member country is under an obligation to treat all the member trading nations in a non-discriminatory manner, especially with respect to Customs Duty and other levies. For illustration, if a country improves the benefits it provides to one trading partner, it is obliged to give the same level of treatment to all other member countries of WTO without discrimination, so they all remain ‘Most Favored’. Ever since its establishment, MFN status has helped in promoting free trade across member countries and restricting dubious and partial trade practices.

 

History of MFN status

India accorded Pakistan with MFN status in 1996, just a year after WTO was formed. Whereas Pakistan has not awarded MFN status to India yet despite multiple promises made during the various talks. While in the past, several requests were made to the Union Government to revoke MFN status accorded to Pakistan, the government has finally decided to do away with it, after Thursday’s brutal attack on CRPF convoy.

India and Pakistan do not have very strong bilateral trade relationship hence economic sanctions on Pakistan may not have much impact. As per the World Bank report, India-Pakistan trade is currently valued at a little over 2 Billion which is nowhere close to the total capacity of 37 Billion. However, if not significant economic implications, the move certainly has symbolic value. It will give the signal to the Indian population that Indian government is equipped to take strong economic measures as well against Pakistan. This becomes crucial given the timing of the general elections and current government hoping to get the second term at the helm. 

The implication of withdrawing the MFN Status

Withdrawal of MFN status is likely to hurt Pakistan to some extent as India may raise customs duties to any level on several goods that are exported by Pakistan, which will eventually discourage exports from Pakistan and hurt their ailing domestic industry.  As per some estimates, this move will hit Pakistan exports close to USD 488.5 Million, which is only 0.10 percent of India’s total imports. These items include Cement, Fresh Fruits, Petroleum products, Bulk minerals, Ores and Finished leathers. Among these, two main items that India imports from Pakistan are Fruits and Cement, on which currently India levies 30-50 percent and 7.5 percent customs duty respectively. Slapping an import duty higher than the existing on these items will mean almost banning the imports. India may not figure in top 10 export destinations for Pakistan, but India serves as a crucial channel for some goods such as Leather heeds, cheaper variants of fertilizers, which are procured by Pakistani importers on very short notice.

India exports to Pakistan close to USD 1.9 billion, which is only 0.63 percent of India’ total exports.  If India takes any decision to stop exports to Pakistan, it is likely to most affect the cotton industry of the neighboring country, which majorly relies on cotton bales imports from India. In recent time, Pakistan has also come to depend upon import of Pharma products and machinery, that are difficult for it to source from somewhere else. Currently, India is allowing imports from Pakistan without trade barriers, whereas, its exports across various tariff lines including Auto, Textile and Agro products are restricted by Pakistan. Indian exporters may not hesitate in sacrificing this much trade with Pakistan in the interest of the whole country.

On the economic front, Pakistan does not have any option to retaliate since it never offered MFN status to India despite promises and it has already banned the import of many items from the Indian side. The preferential access that Pakistan grants on 82.1 percent of tariff lines under SAFTA are also partially blocked in case of India, given it, maintains the long negative list of 1209 items that cannot be imported from India. In practice, many of the goods are exported to India via a third country usually the United Arab Emirates and only 138 items are exported to India through the Attari-Wagah land route. Cargo trucks cannot move beyond the border zones hence goods must be trans-loaded at the border itself, adding significantly to the time and the cost, thereby discouraging trade expansion.

In nutshell, withdrawing MFN status may not have any significant impact on Pakistan but, this move will surely be welcomed by people of the country. More such stringent economic and diplomatic measures are required to sideline Pakistan on the global front and stop it from harboring terrorists on its soil.

References:

  • https://www.livemint.com/politics/policy/withdrawing-mfn-status-to-pakistan-will-divert-more-trade-1550218667008.html
  • https://www.indiatoday.in/india/story/india-withdraws-most-favoured-nation-status-to-pakistan-what-it-means-1456746-2019-02-15
  • https://in.reuters.com/article/india-kashmir-group/explainer-jaish-e-mohammad-the-pakistan-based-militants-at-heart-of-tension-with-india-idINKCN1Q41I7
  • https://economictimes.indiatimes.com/news/politics-and-nation/no-longer-a-most-favoured-nation-will-that-hurt-pakistan/articleshow/68007834.cms
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